Monday, August 31, 2009

"What's the best attribution system?"


A client who is considering a switch in attribution vendors asked me what the best system is. Well, that all depends, doesn't it? Attribution software is a bit unique because it requires the firm to give a lot of thought as to how they wish to derive attribution:
  • what model do you want to employ?
  • geometric or arithmetic?
  • holdings- or transaction-based?
  • do you want the interaction effect to be shown, ignored, combined with another effect?
  • how would you want "off benchmark bets" to be handled?
  • do you want attribution shown at the security level?
  • daily or monthly?
  • what attribution linking method do you prefer?
  • and more!
While some of these points may be handled across all vendors (e.g., virtually all equity attribution vendors support the Brinson-Fachler model, though not all support Brinson-Hood-Beebower), there are others which will vary by vendor (especially when it comes to fixed income attribution).

The firm should decide how they want to handle each of these before starting off on their search. If they don't care, well that's fine, too. But I suspect that most firms, when they understand the differences, will make a choice.

Software searches are always loads of fun, kind of like looking for a new car. And just as with a car purchase, we wouldn't ask someone "what's the best car?," as we first need to decide what kind of car we want (SUV, coupe, van, sports car) as well as how much we want to spend. And while we wouldn't necessarily expect a new car purchaser to solicit the help of a consultant (though a spouse or friend may assist), software searches often involve the use of consultants because of the amount of time needed and the thoroughness required for a successful search.

Sunday, August 30, 2009

It's not about me

This morning, while driving to the store, I happened to catch Rev.DeForest "Buster" Soaries preaching on the radio. Buster is the pastor of First Baptist Church of Lincoln Gardens in Somerset, NJ. I know Buster and have heard him preach, both in person and on the radio, and know him as a very gifted and powerful speaker. Today he spoke about the notion that what we want, what we do, or where we are shouldn't be based on what we want, but rather on what God wants. He cited the first line of Rick Warren's book: "It's not about you."

This caused me to reflect a bit on some of my actions. During the past ten months or so I have been extremely forthcoming with my views regarding the proposed changes to GIPS(r). Some of these comments drew a negative reaction because I was offering editorial views rather than simply stating what the proposed changes were. Even my recent article in the NYSSA's journal caused some angst with some folks. The easy thing for me to have done would have simply stayed quiet and, at most, stated what the proposed changes were, without offering any commentary. But that's not me.

Clearly not everyone is comfortable being so outspoken, even if they disagree, mildly or strongly, with what's being proposed. Even some folks in influential positions who we might expect to offer their views often remain silent. For me, professionally, it might very well have been better to have been like that. But when I see something I disagree with or think is wrong, I believe it's my duty and obligation to speak out, regardless of the fallback that may occur.

The GIPS Executive Committee will meet in Singapore in a few weeks to begin to hash out the final version of the next edition of the standards. I would very much like to be there to hear what's discussed, but will be conducting a GIPS verification that week and so will have to wait until they make their decisions public.

Saturday, August 29, 2009

Investment-Performance.com ... so promising

A few years back someone began a website, investment-performance.com, to provide a variety of services, including a way to get questions answered. They asked me, along with a few others, to serve as moderators. And periodically I'd offer comments.

Well, earlier this year I noticed that apparently some spam artist had cracked their code to the point where I was getting 20-25 messages a day, with most, if not all, being garbage. How sad.

What is wrong with some people that they have to "get their kicks" out of being disruptive like this? Of course those who introduce viruses or who are scam artists are worse, but they're all pretty sick as far as I'm concerned.

I suspect that the sponsors of this site have decided not to make the investment to ward off these hackers: they most likely employ older technology that isn't as fool-proof as what's available today.

Unfortunate, as this has been a good site. I now have all their messages automatically go to "junk," because I simply can't take the time to go through so many to find the occasional one that's legit. And so if you've been on this site and have wondered why I don't respond any more, that's it!

And so, if you have a question, send it to me directly and I'll do my best.

Friday, August 28, 2009

And the reason you get an examination done is ???

Our GIPS(R) verification business has done extremely well this year: it's become the fastest growing segment of our firm's offerings. And when we replace a verifier we often find that the firm had previously had, in addition to a firm-wide verification, examinations performed. And invariably we ask, "and why do you have these done?" And the responses can vary from "our verifier recommended them" to "well, we have always had them done." And while we don't like to turn business away, we always discourage their use. And why do we do this?

Well, first of all, let's briefly consider the history of verifications. Under the AIMR-PPS(R) you may recall that there were two "levels" of verification: Level I, which is equivalent to a GIPS verification, and Level II, which is akin to an examination. I won't bore you with all of the gritty details of the evolution of verification during the first 3-5 years of the AIMR-PPS. Suffice it to say, it was confusing and controversial.

During the "old days," the "big four" (or should I say, "final four") generally refused to do a Level I; so most of their clients had Level II's done. Along comes GIPS with some changes to what a verification constitutes, and the "big four" decided to offer GIPS verifications (as well as examinations). So, firms that had previously had Level IIs done naturally continued with examinations: makes some sense.

BUT, why do them? As Chuck Tschampion (former co-chair of the AIMR-PPS Implementation Committee) stated in a Journal of Performance Measurement interview several years ago, the Level IIs (read "examinations") have virtually nothing to do with the issue of compliance: they deal with a check of the numbers (i.e., is the firm "cooking their books"). Now, to say that it has "nothing" to do with compliance may be a slight bit of exaggeration, but not much.

It's my general belief that the firm will know whether or no they're "cooking their books." And so they don't need someone to come in and say "it looks clean" or "no, you've got problems." So the motivation to have them done should be based on a market need for such an investment.

It's interesting to note that our most recent survey of the standards confirms that most U.S. firms get examinations done, but elsewhere they're a rarity. E&Y's Martin Schliemann further confirmed in the most recent issue of The Journal that the European market sees little need for examinations.

We are currently bidding to replace a U.S. money manager's verifier who currently examines half of their composites; we suggested that unless they are being asked for examinations by prospects or clients, why continue to do them? The firm was apparently persuaded by our logic, and asked that we only bid on a verification.

Look, we don't want to turn away revenue, especially in this market. BUT, we also don't want to have you spend your money unless there's a good reason for it. So, if you want examinations done, we'll be happy to comply, but we're also comfortable just doing the verification. Such a posture makes verifications more economical and should encourage even more firms to have them done.

Monday, Monday

Monday marks the end of August, which many in the northern hemisphere find a bit upsetting. Oh, well. But more importantly it marks the end of our offer to save an additional $100 on the registration fee for our upcoming Trends in Attribution symposium (TIA). As noted before, we've drastically reduced the rate overall in order to make the event more affordable this year; but this additional savings is even more of a reason to sign up now! And so, if you haven't done so yet, we encourage you to sign up by this coming Monday. Please contact Patrick Fowler (PFowler@SpauldingGrp.com) or Chris Spaulding (CSpaulding@SpauldingGrp.com) for more details.

Thursday, August 27, 2009

Is THAT what it means?

Please allow me to digress from the subject of performance measurement for a moment.

As a writer, I love words. I like to learn new words and have a better grasp of how words should be used. It's interesting, I think, how many words have, through years of misuse, lost their original meanings. Let's review a few.

A good thing or a bad thing: I recently learned that I had been mistaken about how to employ the word "visionary." If I was called a visionary, I would have thought it to be a compliment, but YOU be the judge: "given to or characterized by fanciful, not presently workable, or unpractical ideas, views, or schemes; a person who is given to audacious, highly speculative, or impractical ideas or schemes; dreamer."

Sorry, but this doesn't necessarily sound like someone to be admired.

All or nothing ... or most?: When I was Mayor of North Brunswick (NJ), my Director of Community Development loved to use the expression "lion's share" to refer to most of something. For example, "they took the lion's share of the funds that were available." I would suggest that most (or should I say, the lion's share of) people would agree with him. But sadly they'd be wrong; at least from the original intent of the word. The term comes from an Aesop fable:

The Lion's Share
The Lion went once a-hunting along with the Fox, the Jackal, and the Wolf. They hunted and they hunted till at last they surprised a Stag, and soon took its life. Then came the question how the spoil should be divided. "Quarter me this Stag," roared the Lion; so the other animals skinned it and cut it into four parts. Then the Lion took his stand in front of the carcass and pronounced judgment: The first quarter is for me in my capacity as King of Beasts; the second is mine as arbiter; another share comes to me for my part in the chase; and as for the fourth quarter, well, as for that, I should like to see which of you will dare to lay a paw upon it."

Sorry, but does this look like the lion's getting most of the hunt, or ALL of the hunt?

Stand on or at? Surely you've encountered a situation where someone refers to that device standing in front of a lecture hall or conference room as the "podium." Well, the word includes the prefix "pod," which refers to feet, as in something you stand ON, not AT (a small platform for the conductor of an orchestra, for a public speaker, etc). That device in the front of the room is a "lectern."

Who uses podiums? Well, not many folks, but they are employed. From our definition we can see that conductors sometimes stand on them so that they are above the orchestra, as do some public speakers. Former Secretary of Labor Robert Reich used one when he spoke at conferences (he spoke at an AIMR (now CFA Institute) annual conference years ago where I saw one of his staff carrying one; Reich is a bit "vertically challenged").

In each of these cases, we have multitudes of people employing them in a manner which is not as originally intended. Unfortunately, dictionary writers often give in and adjust the word's meaning accordingly (check out, for example, "podium" and you will no doubt see the word "lectern" shown as a meaning).

Unfortunately some "words" that aren't even words are often accepted into dictionaries, which some would consider blasphemy. Take for example "irregardless." I first encountered this word in the military: I had a Battery Commander who often employ this word. The proper word is "regardless": the "ir" serves no purpose. But, check it out in your dictionary: chances are it's made its way in.

Oh, well. Enough venting for one day.

Sources: definitions come from www.Dictionary.com. Aesop's fable was, of course, written by Aesop, but I found it at http://ancienthistory.about.com/library/bl/bl_aesop_lionsshare.htm.

Wednesday, August 26, 2009

CIPM Exam Prep

Okay, if you're taking either of the CIPM examinations this Fall and are looking for training to help you, you're a bit late as we're holding training this week in New Brunswick, NJ. Sorry.

BUT, you can still obtain a set of "flash cards," which can prove very helpful in your prep work. We know of one colleague who claims he only used the flash cards to pass the principles exam! While we wouldn't encourage such a strategy, we do encourage their use.

They're available at a nominal cost of US$50. To learn more contact Patrick Fowler (732-873-5700: PFowler@SpauldingGrp.com). Note that these cards have been updated to reflect the revised examination materials!

Attribution in surgery

I recently listened to a new Wayne Dyer recording during which he mentioned a study that was recently done regarding surgery. When individuals have severe, chronic pain from arthritis in their knees, they often undergo surgery. One orthopedist knew that the surgery worked but didn't know what particular aspect of the procedure was the critical one. And so, he decided to do a test.

He had three groups of patients: (1) patients who underwent the traditional surgery, (2) patients that had their knees opened up, but only washed with water, and (3) patients who had incisions done, but no surgery at all. Afterwards they found that EVERY group had the same level of success. Some of the patients who had no real surgery performed could now run, play tennis, and do other activities that were previously impossible for them to do. And so what could they attribute this success to?

Attribution is critical to many aspects of life, right? Again, we in performance measurement often borrow ideas, techniques, strategies from elsewhere and make them our own. But doing the right kind of attribution can provide good answers. We'll be speaking more about this shortly.

Monday, August 24, 2009

As the economy turns

Over the past few weeks we've seen many indicators of a turnaround for the economy at large and the market in specific. The very wide and dynamic intraday shifts in the DJIA, for example, seem to have dissipated, and bad news doesn't cause the market to nosedive as it did earlier. Unemployment is trending downward while housing is on a rebound.

Our firm, like many, has its own barometers we monitor. Take training, for example. Until now we only conducted a few in-house classes this year, but in the next two months expect to have five: quite a dramatic change, with more inquiries coming in. This is, of course, good news for us but also indicates that firms are easing up on their training budgets, which had been in a deep freeze for a while.

Attendance for our third annual Trends in Attribution conference is on par with where it was a year ago, and we of course hope this continues if not surpasses last year's record attendance.

But we are also looking forward, as many others are, to 2010, when we expect to see even more significant changes in our economy.

Friday, August 21, 2009

Word of the day: contumacious

I recently came across the word "contumacious." Not being familiar with it, I turned to one of my favorite websites (www.Dictionary.com) to learn its meaning:

stubbornly perverse or rebellious;
willfully and obstinately disobedient
.

I suspect there are some who would give me this label, given my sometimes headstrong views about various topics, including the issue of time- versus money-weighting.

When discussing this topic in class I often reference the movie The Poseidon Adventure; not the remake but the original from 1972. There's a scene shortly after the boat "did a 180" where the fallen away former Episcopal priest (played by Gene Hackman) instructs his small band to go in the direction opposite of where everyone else seems to be heading. Ernest Borgnine challenges him, asking why he thinks he's right when everyone else seems to feel that the other direction is best. As it turns out, the majority are heading to their death, while Hackman is correct.

Following the crowd is very easy; it's difficult to stand alone. I'm pleased to be joined by the likes of Stefan Illmer and Steve Campisi in my quest to see the IRR achieve its rightful place as the measure that should most often be employed. While we have a ways to go, we are definitely making progress.

I suspect that some of my views regarding the proposed changes to GIPS were also not well received by some: but I believe there are times when it's important to be forceful and direct. Five years ago there were some who pushed for mandatory verification, but I refused to give up in my opposition. Others joined me, and we prevailed.

Our industry remains at its infancy; we cannot be silent when we feel there are better ways to do things.

Thursday, August 20, 2009

GIPS 2010 - continuing to get the word out

I'm pleased to report that the New York Society of Security Analysts (NYSSA) published an article I wrote on GIPS(R) in their current issue ("Major Changes to GIPS," Vol 2, #3; http://www.theinvestmentprofessional.com./vol_2_no_3/hotzones-compliance.html). This was my first article for this journal and I was flattered to be asked to write it.

I'm also pleased to report that our firm did an extensive amount of publicity on GIPS 2010. In addition to this article:
  • John Simpson and I spoke before several different CFA Institute societies on the proposed changes
  • Our firm hosted two webinars on GIPS 2010
  • I frequently wrote about the subject in our monthly newsletter
  • and I frequently commented on it in this blog.
Our comments on these changes remain our own and don't necessarily reflect the views of the various committees on which I serve. But as active participants in the industry, we feel obligated to publicize any relevant information about the standards. We're confident that many of the comment letters that were submitted were influenced by our efforts.

We, like you, anxiously await the final document.

Wednesday, August 19, 2009

Fair value

I just saw a story a Bloomberg regarding Nobel Laureates Myron Scholes and Robert Merton's call for more accurate valuations on illiquid securities (http://www.bloomberg.com/apps/news?pid=20601109&sid=aiVPT2XgAgto#).

The problems with these assets came to a head last year when many holders of subprime mortgages had them on their books at inflated prices, but given their lack of liquidity had a challenge when trying to value them at more realistic prices. Last year Massachusetts Representative and chair of the House Committee on Financial Services, Barney Frank, suggested that institutions offer two prices: the listed one and what they thought was the more realistic one. I actually found this suggestion as having some merit, though implementing it would no doubt be quite difficult (from both accounting as well as procedural perspectives).

Whether FASB has the answers or not is unclear to me, but I suspect many firms would like guidance in this area.

Risk-adjusted returns & money weighting

Most academic articles that deal with "returns" are actually dealing with risk-adjusted returns. In the course of writing an article on this subject I came across countless such articles. In The Journal of Performance Measurement we've tackled both this subject as well as pure returns (i.e., returns without the adjustment for risk), as both topics have value.

One topic which I don't recall seeing anything on is risk-adjusted performance relative to money-weighted returns. Given my general preference for the IRR, it's high time I took on this topic. Later today I will conduct a webinar on risk-adjusted performance but sadly won't be including anything on money-weighting as the subject hasn't yet gotten enough of my attention.

When evaluating the risk of money managers, clearly the standard approach of measuring risk-adjustment relative to time-weighted returns makes sense. But what about cases where the returns should be money-weighted: should the risk-adjusted measure likewise be? I would think so. But how to accomplish this might require some further thought; something I intend to invest in the coming weeks. So stay tuned!

Monday, August 17, 2009

CalPERS to comply with GIPS

The California Public Employees Retirement System (CalPERS) announced that they will comply with the Global Investment Performance Standards (GIPS(R)), or at least as much of them as they can (http://www.privateequityrealestate.net/Article.aspx?article=44988&hashID=878B8EB9DCCE0050D5A93C6DB9C03F0613D03C16).

This isn't the first time I've heard of plan sponsors who want to comply. There was an article in P&I a few years back where someone voiced a great deal of upset at the notion of these institutions claiming compliance because the standards are meant for money managers, not their clients. I responded with a letter-to-the-editor that acknowledged that the earlier writer was technically correct, but what's the big deal? In fact, I've voiced support for some time that plan sponsors should be able to claim compliance, too.

In my comments to the GIPS EC regarding GIPS 2010, I suggested that they address this. Hopefully, with CalPERS announcement we will see some movement on this.

Sunday, August 16, 2009

Michael Vick returns to football

There will no doubt be a lot of controversy surrounding the Philadelphia Eagles' announcement that they have signed former Atlanta Falcons quarterback and convicted dog fight promoter Michael Vick to a two year contract. I happen to believe that Vick "did his time" and deserves a second chance. But what does this have to do with investment performance? Well, not very much, but...

In our attribution class I often reference the 2005 NFC Championship game when the Philadelphia Eagles defeated Vick and the Falcons. Newspapers credited the Eagles defensive coordinator, Jim Johnson for his strategy to shut Vick down as a big factor in the Eagles' victory.

Sports often serves as a metaphor for attribution. And there's some irony here that Vick has joined the Eagles. As an Eagles fan and a former Vick admirer, I wish them both success this coming season.

p.s., Recall that I commented on Jim Johnson's death on July 28, so if this topic seems familiar, that's why!

Saturday, August 15, 2009

Madoff: the other shoes are beginning to fall

Happy the man who meditates on wisdom,
and reflects on knowledge.

Sirach 15: 20.

When we learned of the Madoff fraud, we knew that he couldn't have pulled it off singlehandedly; he had to have coconspirators. And this week we learned of one, who had been with him a long time and personally benefit ted by their scheme to defraud trusting investors.

Madoff was a perfect example of a "closed system," where they did everything for the client (custody, trading (well, they were supposed to trade), reporting), with no independent third party to provide a check on what was going on. Custodians should be benefiting from this ruse as a way to emphasize the value they provide.

Author Harvey Mackay has stated that when something looks too good to be true, it probably is: that was Madoff. Unfortunately, with such a cadre of long-term clients who sang his praises, it wasn't hard to persuade more and more to join the fold and allow the scheme to continue.

If there's anything good that's come from our market downturn and recession, it was the discovery of these tricksters who no doubt would be continuing today had it not occurred.

p.s., in today's WSJ we learn of new books that have recently been published regarding the Madoff scandal. I don't know about you, but I'm going to wait until more is known ... I think it's premature to see these books given the world of information yet to come regarding how he pulled this off.

Friday, August 14, 2009

When the new verifier finds a problem

I'm reminded this week of a void in the GIPS(r) verification guidance regarding what to do when a new verifier finds problems that the old verifier didn't. I understand that this will be addressed in the future, but right now there's no guidance.

Let's say that Verifier A verified Firm XYZ for the period 2000-2007 and issued a verification report, suggesting that "all is well." Firm XYZ decides to replace their prior verifier with Verifier B who conducts the verification for 2008. During the course of their review Verifier B finds several problems which likely didn't just arise, but were most likely present for the prior period that had been reviewed by Verifier A. What happens next?

Let's say that the firm corrects the problems for 2008: can or should Verifier B issue a report? I believe the answer is "no." Although the firm's records are correct for 2008 and although Firm B didn't have anything to do with the prior verification, they should seek some assurance from the firm that they have gone back and corrected the prior period, too. They should request, in writing, such a statement. Since they hadn't been hired to verify the prior period they wouldn't be required to validate anything; they can rely on the client's word. If for any reason the verifier feels uncertain, they can indicate this and withhold their report pending satisfaction of the verifier's concerns.

I believe that this is what we'll find to be in the upcoming guidance, or something like that.

Wednesday, August 12, 2009

Trust, but verify

John Simpson and I are conducting a GIPS(R) verification and I'm reminded of Ronald Reagan's advice to trust, but verify.

On multiple occasions we've encountered situations where the returns are incorrect, as produced by the software. Sometimes it's because the formula is simply wrong. An example of this surfaced a few years ago during another verification where I discovered that the composite return methodology the client's vendor was using was invalid. Another time a major vendor's calculation was in error: I told the vendor they had a "bug," but they said that no, the software was doing what they wanted. And they were correct! Unfortunately, what they wanted the software to do was wrong. Another vendor had a known "bug" that caused errors whenever certain corporate actions occurred; for some reason they allowed this problem to exist for several years before addressing it.

Sometimes a verifier will offer their clients formulas that turn out to be wrong. This happened recently with a formula to do carve-outs. The client had used this formula for several years, only to learn (from us) that it wasn't correct. We have also encountered rate of return formulas, though appearing to be quite right, are in reality, quite wrong.

It's unfortunate that this occurs more often than it should. Clients pay their software vendors and verifiers lots of money, and expect accurate and correct information in return.

Monday, August 10, 2009

Discretion on discretion

On July 27 I offered some comments on "discretion," from a "GIPS" perspective. This resulted in a few responses, so I thought I'd comment further.

Firms have discretion on how they define discretion ... within reason, of course. But, their rules need to be clear and testable. That is, two parties looking at the firm's rules should draw the same conclusions.

Let's take restricted securities. If a new client includes securities in their portfolio that you can't sell is the account non-discretionary for GIPS (r) purposes? Not necessarily. This question was addressed a long time ago (1992), in a handy "Answers to Common Questions" brochure that AIMR published for the AIMR-PPS(R).

Most accounting systems allow you to flag the account as "restricted" or "non managed," so that it will be excluded from performance. [A key point: the return on such assets are NOT to be included in your performance. On occasion we've found firms that incorrectly included it. Technically, any income (interest or dividends) from these assets should also not be included with the account's performance.]

You CAN, if you so choose, to make a blanket statement that the presence of ANY restricted security, no matter how small, would cause the account to be non-discretionary. I happen to think that this wouldn't be a good idea as it could possibly exclude a lot of accounts and, in many cases, these securities don't impede the manager's ability to invest. The last point is really the important one: does the presence of these restricted assets cause the manager to alter their strategy in such a way that the result really doesn't bear much resemblance to what would have happened had there not been any restricted assets present [talk about a run on sentence!].

As firms broaden their inclusion rules (and as a result, narrow their rules for non-discretion), we can anticipate an increase in dispersion. This is the trade off the manager faces. There are pros and cons, as well as benefits and disadvantages, [I guess I'm being redundant] to each approach. The good news: the manager decides. The bad news: many firms get it wrong. Yes, managers have discretion over discretion, but it's easy to make mistakes. Thus, having a trusted and knowledgeable advisor, consultant, verifier handy is always a good idea.

Friday, August 7, 2009

Misleading perception of accuracy

In his book, When Genius Failed, author Roger Lowenstein said that Long Term Capital Management reported the Value at Risk on their portfolio with such precision that their investors felt confident in their manager's control of their assets. LTCM's client letters went further than most managers because they did not merely concede the possibility of a loss, they calculated the supposed odds of it occurring, and to precise mathematical detail. But as David Dreman pointed out, "there's a false precision to analysts' forecasts that enable over confidence."

The Wall Street Journal ran a story earlier this week regarding the precision of fuel consumption accuracy (http://online.wsj.com/article/SB124940692698405243.html#mod=todays_us_opinion) whose title, "When Precision is Only 92.11567% Accurate" speaks to me regarding our industry's sometimes naive attempts at improved accuracy, given the degree of noise that we face in our system. The author quoted Peter de Nayer, an independent U.K. auto tester who said "It is ludicrous to suggest that you can get fuel-consumption accuracy anywhere past the first decimal place, let alone the second." Might the same thing be said about some of the information reported to clients and prospects? We know some managers who report returns only to one decimal place; perhaps this isn't such a bad idea. On the other hand, I've seen reports with returns to THREE decimal places: precise, but are they accurate?

When I was Mayor of the Township of North Brunswick (NJ), my finance officer would give me reports down to the penny; I told him to just stop at the thousands: not that I questioned his accuracy, but because I simply didn't need to know that level of detail. I also wouldn't have cared if he later found an error that was so immaterial that it wouldn't have mattered to me and yet would have required him to provide me with a revised report. And while I'm aware that many individuals DO like to see such precision, I can't be bothered. At least in some things.

In our training classes I sometimes wax poetically about this topic, and mention the number of people there are in the U.S., but immediately correct myself because surely someone was just born or died. The article, too, uses the census metaphor to make their point. And their point is mine: "Still, decimal places lend the aura of authority and the veneer of verisimilitude. So the modern world is awash in squishy numbers wearing the many-figured garb of faux precision." When we show numbers to increasingly more decimal places people actually believe them ... unfortunately, they're often incorrect. So why bother? Is that detail REALLY necessary? Especially when in the end, the noise surrounding them may cause errors to exist that we're simply unaware of?

This topic, precision vs. accuracy, is one that we've taken up at our annual PMAR conference and often engenders debate. The Bible's book, Ecclesiastes, perhaps, should have included the line "a time to be precise, and a time to round," or something to that effect. If we're attempting to put someone on the moon, we better be accurate to several decimal places or they may miss their landing point by quite a distance. But there are other times when we can back off a bit.

The reality is there are differing views on the subject. This article may cause you to think, however, about the similarities in our industry with what we encounter when attempting to report returns and other measures to clients.

Thursday, August 6, 2009

Advantage or disadvantage?

I'll credit Carl Bacon for mentioning several years ago that compliance with the GIPS(R) standards was no longer an advantage; because SO many firms had achieved compliance, failure to comply was a disadvantage. Thus by becoming compliant a firm would eliminate a disadvantage.

This situation doesn't, however, apply to real estate, private equity, hedge fund, or high net worth managers. where it's evident that less than half the managers of each of these areas comply. To me, this means that there's a great opportunity for real estate, private equity, etc. managers to take the initiative and become compliant now, rather than later, so as to (a) gain an advantage over their competition, (b) be seen as a leader in your segment of the market, (c) act rather than react to what may ultimately be a virtual requirement.

Let's consider, for example, high net worth managers. It's rare, no doubt, for prospective clients to ask about GIPS compliance. But, the manager can use compliance as an advantage by educating their prospects and clients about the standards, and why they chose to invest the time and money into becoming compliant. The same applies to real estate, private equity, and hedge fund managers.

If your firm falls into any of these categories, act now and take advantage of the advantage compliance offers!

Wednesday, August 5, 2009

Appraisal institute chimes in

The Appraisal Institute announced that they endorse more frequent valuations of real estate properties, as was proposed in the GIPS 2010 draft (see http://nationalmortgageprofessional.com/news13178/appraisal-institute-supports-proposal-require-more-frequent-valuations-investments for more details).

Perhaps I'm wrong, but I liken this to verifiers endorsing mandatory verification. Would appraisers benefit financially by more frequent valuations? I suspect they might.

When mandatory verification was proposed, we, as well as just about every verification firm who commented, opposed it. To do otherwise would have been self serving. Verifiers didn't offer their comments in a disingenuous manner, but truly could justify why they opposed such a move. We totally support verification as we believe that it's extremely important that firms that claim compliance with GIPS(R) undergo such a review. But in the end, we believe it's up to the firm to decide if they want to spend the money.

We questioned the need for more frequent appraisals of real estate, as proposed by the GIPS Executive Committee, because of the added cost it would bring. Currently firms claiming compliance must have properties valued by independent parties once every three years; the proposal is to increase this to annual.

In their announcement the Appraisal Institute makes valid arguments in favor of the increased frequency of valuations. But, are they being truly objective and taking into consideration the financial impact such actions would have on the managers? Yes, we've seen significant changes in real estate properties over the past year, but would we not believe that the asset manager would adjust their valuations accordingly?

Perhaps I'm being unfair in my questioning of this position and therefore welcome your thoughts. This organization has a role in the industry and felt it important to offer their opinions. Perhaps their views are totally rational and without any bias. Perhaps their focusing more on the owners than the managers. Again, your comments are welcome

Sunday, August 2, 2009

If you say only one prayer a day, make it "Thank you"


We are especially blessed with the arrival of our first grandson, Brady David Spaulding, born to our son, Christopher, and his wife, Monica, Saturday, August 1, @ 10:27 PM, at St. Peters Hospital in New Brunswick, NJ. Weighing in at 6 lbs, 12 ounces, and with a height (length?) of 20 1/2", he is, as you can plainly see, adorable. Our son, and his beautiful wife, performed exceptionally well in providing us with this gift. We give thanks to our Lord for the many blessings we have received, and are especially blessed this weekend with this newest gift.

Please excuse me if my passion for performance is temporarily interrupted with my passion for my grandson, Brady.

p.s., As for today's title, I got it from listening to a Wayne Dyer CD, "Excuses Begone." I highly recommend Wayne to you.