Tuesday, July 24, 2012

Wrestling with what IS and IS NOT supplemental information for a GIPS presentation

True Confession Time: years ago, when the concept of "supplemental information" was being introduced, I opposed the idea of actually "labeling" this information. While understanding the notion of supplemental is important, I didn't see much value in having to label it. Today, my view hasn't changed. But that doesn't matter: the rule is that one must label if you're a GIPS(R) (Global Investment Performance Standards) compliant firm. [But, I want to make it clear that this comment doess not constitute a criticism of either the Standards or those who crafted them. It's merely an opinion.]

Now, the tricky part: what to label?

Let's begin with a definition of  what supplemental information is; from the Standards' glossary we have:
Bottom line, it's performance-related information that's neither required nor recommended. And so, when you want to include performance or risk information along with your compliant statement, you need to decide if it's supplemental or not, because if it is, you have to label it.

As GIPS verifiers, we often encounter clients who have elected to include additional information, and must consider whether it's supplemental or not. Let's consider the following two examples, from recent verifications we conducted:
  • benchmark risk statistics, other than the required 36-month annualized standard deviation: while the standards recommend that firms "present additional relevant COMPOSITE-level EX-POST risk measures" (see ¶ I.5.B.6), it doesn't suggest the same for benchmarks. Was this an oversight? Is there a sense that this may be implied? Think about it: to show, for example, the Sharpe ratio for the composite but not the benchmark has limited value, right? But, strictly speaking one might conclude that it has to be labeled. I'm of the opinion that this is a "gray area," and am fine either way: want to label it? Fine! Don't want to? I'm okay with that.
  • growth of a dollar (or Euro, Pound Sterling, etc.): while charts are recommended, I believe only of information that's recommended or required. And so, since such a chart (or the underlying data) isn't recommended nor required, I'd say this falls into the "supplemental camp," and requires a label.
What if you fail to label something, is your claim invalid? I would say "no." I think that this would be a minor infraction, and one that simply needs correction.

What if you label something that really isn't supplemental? I'd call this an oversight, and say that it does not invalidate the claim. Once made aware of the error, simply remove the label.

Have a different view, thoughts, insights, or other examples? Please chime in!

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