Wednesday, December 21, 2011

The 10 Best Things About GIPS

As I explained in yesterday's post, I would balance out my 10 "not so good things" about GIPS(R)" (Global Investment Performance Standards) with my "10 best."

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#10 3-year annualized standard deviation: Okay, so I'm not a huge fan of standard deviation as a risk measure, and voted against it in my comments on the 2010 exposure draft. But, I realize, too, that getting agreement on a risk measure is quite a challenge. And the need for a risk measure in the Standards justifies something, almost anything. Standard deviation is easy to calculate and understand. And firms can always augment it with other risk measures, and probably should.

#9 The GIPS Help Desk: Arguably, one could simply say the CFA Institute, but we'll just focus on the individuals who respond to questions that come in on "all things GIPS-related." They work very hard to respond quickly to requests, and attempt to be as clear as possible. No doubt they are often inundated with inquiries. Where would the Standards be without them?

#8 The GIPS Country Council: This group represents the 30+ countries who endorse the standards. And while they do not dedicate the same level of time as the EC, they are still extremely important, and worthy of our praise and thanks.

#7 The GIPS Executive Committee: Where would we be without this body, to manage the standards' development? Eight of its nine members are unpaid volunteers, who devote countless hours to the standards, on our behalf. We are in their debt and gratitude. While we may not always agree with them, we recognize that they do what they believe is best for the industry.

#6 Significant cash flows: I take pride in pushing the introduction of this provision, along with Neil Riddles and a few others, who felt that to force managers to keep accounts in their composites when they experienced very large flows made no sense. While many firms don't avail themselves of this option, many do, and at least firms have this opportunity.

#5 Verifier independence guidance: Having seen some verifiers go to great lengths to obliterate any semblance of independence, the introduction of a formal guidance statement on this matter was an important step, in at least memorializing some rules. Granted, some verifiers still manage to cross the boundaries, but at least we have rules.

#4 Dispersion: In 1970, Chevrolet introduced the Vega (I bought one (model year 1972) in November 1971: my first new car). It was a nice car for its time, but the initial edition (model year 1971) was missing something: a glove box! An acknowledged oversight which was quickly corrected with the 1972 version. Well, the initial version of the AIMR-PPS was missing something: dispersion! This was corrected in 1997, and provides a great deal of insight into a composite's management: a return by itself just doesn't say enough. Does the manager consistently apply the style across all clients, or are they "all over the map" with their investments? This is important information, which is a necessary and required disclosure in the Standards, by way of standard deviation (not to be confused with the required 3-year annualized, which is a risk measure; here, it's a measure of dispersion), high/low, range, or quartile dispersion, for any composite with six or more accounts present for the full period.

#3 The composite: To me, the bedrock of the standards is the composite. They're powerful, and yet flexible, too. Yes, they can be quite complicated, but at the heart, they're quite simple, at least to understand. They provide the prospective client with a thorough understanding as to how the manager managed the style/strategy they're interested in. What a concept!

#2 The globalization of the standard: AIMR, back in the mid 1990s, had the forethought to create a global committee, which ended up crafting GIPS. They could have allowed each country to "do their own thing" (as many began to do, following the introduction of the "PPS" in 1993) but they chose to be proactive, assemble a team of international performance professionals, and create what became a single global standard: what an accomplishment!

#1 The standards, in general: I believe we owe a huge debt of gratitude to the gentlemen who were on the "blue ribbon committee" back in the mid 1980s who crafted the first performance presentation standards: a great idea that has seen worldwide support. And the fact that this was taken up by AIMR (now the CFA Institute) is a huge commitment, responsibility, and service to the industry.
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Anyone involved with the Standards could obviously craft their own list. And I do not expect you to agree with everything I've written. If you have ideas, thoughts, reactions, please let me know! But reminder: please do not do it "anonymously," as it then won't appear in the blog.

4 comments:

  1. Dave, Thanks for sharing the list. I'd like to add some....

    •The option to have net and/or gross of fees - There’s no real consensus out there on what is preferable (from my experience). Having the option is nice. The fact that the fee schedule is required makes returns comparable.
    •The Q&A Database - I’ve been fortunate enough to find what I am looking for almost every time. It’s easily accessible as well.
    •Guidance Statements - Although some might not be so clear, they are detailed and provide “guidance.” They are also easily accessible.
    •Disclosures - Pretty much everything is identified in the GIPS provisions (section 4) that needs to be. I don’t recall having ever thought there was a missing requirement or a firm can leave something out that may be pertinent to the presentation. It seems like the EC and others put great effort into this section of the provisions.

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  2. Thanks, Jed. Some good additions to the list!

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  3. Three more things that I'll add:

    1) The "expansion" of the GIPS standards on a global basis is a great thing. In recent months we witnessed new country sponsors coming into existence in Luxembourg and Peru. So the global standard is spreading, which is good for all of us.

    2) Recently a document was circulated from the GIPS EC clarifying that plan sponsors can claim compliance with GIPS. As there had been some confusion and debate on this topic previously, the issuance of the document (http://www.gipsstandards.org/resources/pdf/gips_outreach_brochure_hi_res.pdf) is very helpful.

    3) I also like that the GIPS EC has published its Strategic Plan, adding greater transparency to what may be coming down the pike... http://www.gipsstandards.org/about/governance/pdf/gips_strategic_plan.pdf

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  4. John, thanks for your contributions!

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