Friday, March 4, 2011

Let's stop celebrating GIPS as the only answer to our return questions

I recently wrote a letter to Pensions & Investments, which was published in their February 21 issue. Titled "Flaw in time-weighting return," it was a response to an earlier P&I article that discussed how plan sponsors need to ensure they're using the right benchmarks. And while I agreed that having the correct benchmark is critically important, it's even more important that plan sponsors employ the correct return methodology. I'm sure that you're not surprised that I was advocating the use of money-weighting for the plan to understand how they are doing, separate from the use of time weighting to see how the manager has done.

I posted the piece on Linkedin, and it has engendered a fairly lengthy discussion in one of the groups. Not surprisingly, there still seems to be interest in relying on what GIPS(R) (Global Investment Performance Standards) has to say, when the standards do not speak to client or in-house reporting. And I am not advocating that the standards should. But it's important that we recognize where the standards begin and end, and it all has to do with what a manager gives to their prospects.

In a recent animation, which I posted here earlier this week, I touched on the frequent use of time-weighting and suggested that one of the reasons is that this is just the way we've always done it. Obviously, this is a topic I have a lot of passion about. If this was an idea that had little chance of succeeding, I would have given up some time ago; however, we are making progress in educating folks, as evidenced by some of the Linkedin comments. But that being said, I will try to be "mum" on it for a while, as there are lot of other things to address.

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