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.
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It is time that GIPS rises to its full potential and takes its correct place in the marketplace by recognizing its responsibility to all investors and fiduciaries - including total portfolio managers such as plan sponsors and anyone else who makes the critical decisions that determine the ultimate success of client portfolios. These decisions include risk analysis, asset allocation and manager selection. And, it is past the time for GIPS to continue functioning as a basic marketing function for single-product managers who simply want to sell their products. Most importantly, it is time that GIPS stops perpetuating the myth that only those who execute transactions are investment managers. In reality, the most important decisions regarding appropriateness, risk and return are the macro decisions, such as where to allocate capital in terms of markets and product managers. To consider a plan sponsor "a client" demontrates a rather woeful ignorance of the overall investment process as well as a painfully narrow view of what makes a client's multi-asset class portfolio appropriate and successful. The fact that we are even having this debate is evidence of the product-oriented, marketing oriented and (yes) fee-oriented state of the investment process. The focus of investing (and the analysis of performance, including GIPS) needs to shift to a simple concept that many seem to have forgotten: STEWARDSHIP. Are we succeeding as fiduciaries? (Are we evaluating our LOYALTY to our clients, our PRUDENCE in decision making and our DILIGENCE in the execution of our investment plans? Or are we simply running a horse race among product managers and making sure that the track is level?
ReplyDeleteOh, and by the way, the "client" of the typical pension plan is not the plan sponsor - the clients are the beneficiaries of the plan! The plan sponsor may be considered the client of the individual investment product managers, but this unfortunate perspective simply proves that the whole GIPS process has simply become a shill for the marketing department. Remember, it's the client's money that's at risk, and we ALL owe a duty of loyalty to that client. The plan sponsor is the fiduciary and GIPS should be helping that plan sponsor to demonstrate the loyalty, prudence and diligence required by their duty to the client.
Want to make sense of all this? Remember who the client is, then put that client first. Then things will make sense - and we will make sense of GIPS. Do plan sponsors need GIPS? The real question is: How can they fulfill their responsibilities without those standards?