Monday, June 11, 2012

GIPS and "non-assets under management" scenarios: what's the proper treatment?

Recently, The Spaulding Group created a website specifically designed to field questions on the Global Investment Performance Standards (GIPS(R)): http://www.gipshelp.com/. It has already had several questions posted, and more are coming in on a fairly regular basis.

It would be redundant to comment here, as well, on questions that we've addressed on the help site.

That being said, I will occasionally post here, too, if the question is one that has a lot of interest or one that I feel needs additional attention.

Case in point; the following was just posted:

If a firm has a composite consisting partially or wholly of "notional" accounts run on lines of credit, is it appropriate to fulfill the Composite Total Assets requirement outlined in the GIPS Standards using the total notional value? Given the fact that compliant performance can be (and is) calculated based on notional values, and that one could potentially have a composite consisting of accounts run solely on lines of credit (i.e. $0 "GIPS" AUM), this would be in the spirit of full disclosure, would it not? It appears that it would be misleading and of little use to a potential client to see only the amount of collateral (if any) in a composite. However, the GIPS do not specifically address this, and many other situations unique to notional accounts.

There exists a Q&A regarding Overlay Strategies that concludes that for purposes of FIRM assets, notional amounts must not be included. However, there appears to be no definitive guidance when it comes to composite assets.

I do not know what Q&A the person who submitted this is referring to; possibly:
http://gipsstandards.org/programs/faqs/gipsresults.asp?Id=49,
though it does not explicitly prohibit the use of notional values.

I think this is a great topic, and worthy of further discussion. I had hoped that the GIPS Executive Committee would have included more on the subject in GIPS 2010, but I guess we'll have to wait for the 2015 edition for anything formal.

My opinion has been that notional values, in certain situations, are the appropriate details to provide. One can show the AUM (be it zero or some other value) and separately, as supplemental information, the notional value. The returns should be derived, in most cases, based on the notional values.

I believe that this is "in the spirit of the Standards."

What do YOU think? Please chime in by commenting below.

Have a GIPS question? Please visit the GIPSHelp.com website!

1 comment:

  1. This comment has been removed by a blog administrator.

    ReplyDelete

Note: Only a member of this blog may post a comment.