Friday, September 28, 2012

The Spaulding Group Wants To Hear From You

Well, maybe.

We want to hear from you if you are an asset manager who IS or IS NOT compliant with the Global Investment Performance Standards (GIPS(R)).

We are wrapping up our survey, and you have only another week or so to join in.

The survey will take you less than 10 minutes (probably less than 5). We SIGNIFICANTLY reduced the number of questions to the ones we think are core. The questions that most firms would want to know the answers to. The ones that will provide the most benefit to our industry once the answers are revealed.

How to participate?

You can go to The Spaulding Group's website, and scroll down to the "2012 GIPS Survey" button.

Or, you can simply go here.

We recommend the former (i.e., go to our firm's website), so you can help our SEO (search engine optimization). [Talk about shameless promotion!]

Seriously, either way works. The important thing is to complete the survey. This will entitle you to receive a complimentary copy of the results.

We've been doing surveys of the presentation standards since 1993 (almost 20 years!), and so have quite a collection of information which we use for comparison purposes, providing the ability to view trends.

And so, please join in.
  • Act soon!
  • Better yet, ACT TODAY!
  • Even better, ACT NOW!!!

Thursday, September 27, 2012

Universal Advisor Performance Standards rule ... or soon will

The Spaulding Group, BrightScope, and the UAPS (Universal Advisor Performance Standards) board of advisors are continuing to move forward with the review of the first draft of these new standards. We are quite pleased that interest in them continues to grow. And this makes sense, as GIPS(R) (Global Investment Performance Standards) isn't for everyone, and yet many (who would willingly adopt GIPS if they could) want a standard to guide them in their performance reporting.

This week we were asked to submit an article on the standards for a European publication; thus, the new standards are going global! But with a word like "universal" in your name, you're bound to figure out eventually that we didn't intend them to be just for the United States. We've penned our article, and once it's published, we'll provide a link.

We are still open to your ideas, suggestions, insights, or just plain comments, so feel free to chime in.

Tuesday, September 25, 2012

Is the SEC now verifying the GIPS verifiers?

Twenty years ago, I suggested to the then head of the AIMR-PPS(R) (the forerunner to the Global Investment Performance Standards (GIPS(R)), Sue Martin, that someone needed to verify the verifiers, because I was discovering misinformation being shared by a few verification firms. Over the years this has continued to be a topic of interest. Unfortunately the GIPS Verifier and Practitioner subcommittee has yet to offer anything concrete regarding this matter; perhaps it's simply a very complicated issue.

In a recent Star Tribune (Minneapolis,  MN) article titled "SEC widens fraud inquiry into Twin Cities money manager," Dan Brown reported that "[late] last month, the SEC served subpoenas on two companies that certify compliance with a rigorous financial reporting system known as the Global Investment Performance Standard [sic] (GIPS). The subpoenas seek all information related to work they've done on behalf of Welliver, Stringfield, DBlaine Capital, or a mutual fund called DBlaine Fund."

The SEC's motives for asking for this information are, of course, open to speculation. But one possibility is that the SEC is, in a way, attempting to verify the verifiers.

This isn't the first firm that (a) had claimed compliance with GIPS and (b) had undergone verification to be found in trouble by the SEC. And so, perhaps the SEC has decided it's time to take a look at the verifiers of such firms. This, I think, is a good thing. And while verification isn't designed to detect fraud, if it's determined that shoddy work was done by the verifier, might some action follow? Since verifiers don't, per se, fall under the SEC's jurisdiction, it's difficult to say what, if any, action would follow. Perhaps merely public dissemination of the verifier's identity?

I suspect that this news will send shock waves through the GIPS verification world. No doubt, more will follow.

Friday, September 21, 2012

PMAR 2013

We, at The Spaulding Group, are very excited about next year's Performance Measurement, Attribution & Risk (PMAR) conference. This will be our 11th annual in North America, and our fourth annual in Europe. Each year we strive to make it better, and we believe we have.

This year we struck on the idea of having a theme for the event: Super Heroes of Performance Measurement.  We created a poster which was unveiled at yesterday's annual GIPS(R) (Global Investment Performance Standards) conference in Boston. Chris Spaulding spoke briefly about the upcoming event and it attracted a nice crowd, as can be seen in the following photos.

We always try to make our events fun, as well as informative, and next year's will definitely live up to this strategy. If you attend, we're confident you will benefit in many ways.

Top Struggles

I recently asked readers to submit their view on the "top five struggles" facing performance measurement departments. Seven folks responded. 

Not surprisingly, there was no single struggle identified by all; in fact, there wasn't a great deal of overlap. Some individuals responded in just a few words, while others provided detailed explanations. I have summarized the responses into this list of 23:

1. Systems
2. The group’s role within the firm
3. Performance data requests
4. Moving away from spreadsheets
5. Creating and documenting procedures
6. Data integrity/quality/completeness
7. End users not taking advantage of the attribution data for future decisions
8. Staffing for development projects / IT support
9. Time
10. Ability to think up new solutions
11. Changes in historical data
12. Timeliness of the entire process; meeting unrealistic deadlines
13. Attribution analysis standards
14. Client questions
15. Training
16. Communications: inability of internal/external clients to articulate requests fully
17. Lack of attention to markets and developments
18. Product knowledge
19. Testing process
20. Innovation
21. Talent retention
22. Decision making
23. Leadership

I said that one would be selected to receive copies of our last two books; I've decided to send each copies, along with our formula reference guide! Thanks for participating. I will shortly show OUR list, and will address this topic in greater detail in this month's newsletter.

Tuesday, September 18, 2012

Is GIPS the solution to backtested performance problems?

Yesterday I posted about Jason Zweig's recent article, that discussed a manager's questionable past performance that was being shown to prospects; it was based on backtested results.  

Rick Ferri wrote a Forbes post that also discussed this manager. He discusses at length the potential problems with backtesting. He suggests that the "problem is that most individual investors do not understand that they’re looking at hypothetical returns even if the required disclosures were written clearly and put in plain view. People tend to not read the fine print − they go right to the numbers." I don't disagree with Mr. Ferri. This is one of the reasons GIPS(R) (Global Investment Performance Standards) prohibit linking hypothetical (e.g., backtested, model) results to actual, where "linking" refers to "Presentational Linking: To be visually connected or otherwise associated within a COMPLIANT PRESENTATION (e.g., two pieces of information are LINKED by placing them next to each other)." (See The Supplemental Information Guidance Statement).

The only issues I have with this post stem from the following statement: "My solution would be an SEC directive that prohibits advisers from using backtested returns in any marketing material. If [a] firm does not have Global Investment Performance Standards (GIPS) results, then they cannot publish performance. That’s clean and simple."

First, is he recommending mandatory compliance? It appears so. At least for anyone who wishes to report past performance. Since we are working with BrightScope and a board of advisors to develop a separate standard (UAPS: Universal Advisor Performance Standards) for those who cannot comply with GIPS, I obviously take exception to this. Second, it appears he is implying that with GIPS backtesting issues will go away; but they will not. GIPS permits it. Of course, if the SEC does prohibit it, then registed SEC firms would be required to follow these provisions, though firms who don't fall under the SEC's regulations could continue to do so.

I don't follow how backtesting going away means that one must follow GIPS.

Backtesting can serve a useful purpose. There is no cure to those who wish to mislead, or fools who wish to part with their money.

Monday, September 17, 2012

The model for how NOT to report past performance to prospective clients

In this past weekend's WSJ, Jason Zweig once again provided fodder for our use. In "Protecting Your Bucket," he describes the practices of RJL Wealth Management, who provides investors with hypothetical performance. The SEC appears to have some issues with this performance, given some of the assumptions underlying the results. For example, a 3% annual inflation rate is used for the entire period shown, even though in reality it was closer to 7 percent. Disclosures were included with the materials that indicate that the assumed inflation rate was lower than it was in reality, but it's unclear that the SEC buys this.

Zweig provides additional details regarding this investor and concludes by writing "No matter how charismatic a financial adviser is, you can't earn 'hypothetical' results. Always ask for data on how actual investments performed." Furthermore, "Whenever an adviser cites a benchmark, ask for proof that it measures assets that are comparable to what you would be buying."

The Universal Advisor Performance Standards (UAPS) may use this piece as an example of things not to do, as well as things to do.

p.s., Here's a link to the settlement discussed in Jason Zweig's article. You may also be interested in the recent proceeding involving Jason A. D’Amato (President of Stanford Capital Management) on performance advertising issues. Thanks to Steve Stone of Morgan, Lewis & Bockius LLP for providing these.

Friday, September 14, 2012

Upcoming Webinars

This coming Monday, September 17, from 11 AM to 1 PM, I will host a webinar titled The 10 Most Common Mistakes GIPS Compliant Firms Make. This webinar is free!

My colleague, John D. Simpson, will host a webinar on Tuesday, September 25, starting at 12 noon (EST). It is a final CIPM Exam Prep event. For two hours John will field questions on both exams. Candidates who took one of John's prep classes, as well as Spaulding Group verification clients and Performance Measurement Forum members can participate at no cost; a nominal fee of only $99 is charged to others.

Please contact Patrick Fowler to register for either or both!

Wednesday, September 12, 2012

Performance Measurement Department's Top Five Struggles

We have already heard from a few folks with their lists of the "top five struggles performance measurement departments face," and there's time for more, but soon there won't be!

I posted an invitation last week for readers to submit their lists. One will be selected to win the two most recent books The Spaulding Group has published; all who participate will get a complimentary copy of our very popular Formula Reference Guide. Please email your list to me by this Friday to qualify!

Tuesday, September 11, 2012

Remembering 9/11

A new publishing year of The Journal of Performance Measurement will soon be here, along with some new additions

You are probably aware of my habit of referencing anniversaries, especially those ending with a "5" or "0." Well, this Fall will see The Journal of Performance Measurement(R) begin a new publishing year, but it won't end with either of these numbers. However, that doesn't mean we won't be making any significant changes, since two are planned!

First, we are introducing the Performance & Risk Measurement Hall of Fame. And while I would love to take credit for this idea, I must confess that it originated with Journal Advisory Board member Tim Ryan (thanks, Tim!). We thought it was a great one, and are implementing it this coming publishing year. As with the Dietz Award, our Advisory Board will pick the winner (I mean, inductees). Anyone can submit nominations by contacting our editor, Douglas "Tough Mudder" Spaulding. Just get your names in soon (we haven't yet announced the deadline, but will shortly; please email them to Doug). We expect to announce the inductees in the Winter issue (the same issue we announce the Dietz Award winner). Induction will occur annually, with the inaugural class expected to be a bit larger (perhaps 5-10) than future years.

Second, we will publish "Milestone Articles" from time to time. These articles, as the name suggests, are ones that have had a major role in the world of investment performance and risk measurement. We believe they need special attention, and will provide it!

The theme here is obvious (though unintended), is it not? Our profession, though relatively young, has had standard bearers in both people and papers, and our publication (such alliteration!) is providing an opportunity to showcase both.

Have suggestions for the Hall (or milestone articles)? Please let us know!

Friday, September 7, 2012

Trading without the cash

I just got off the phone with a GIPS(R) (Global Investment Performance Standards) verification client, who is trying to reconcile the settlement and trade date sides of trading.

On trade date, they don't have the cash necessary to make a purchase; but, by settlement date they will have it. From a settlement date perspective, they don't care that the cash isn't there, knowing that by settlement date, the cash will appear. However, from the trade date perspective, we need the cash (or, as Cuba Gooding would put it, "show me the money!").

In performance measurement, I think it's fair to say that we don't care about settlement. Of course, in our hearts we do, but not in our returns.

In order to pull this off, we need to create cash on trade date. Ideally, we post a fictitious transaction that brings the necessary cash in for the trade, which will be picked up by our return formula (e.g., Modified Dietz). When the cash finally arrives, we need an offsetting cash transaction, so that the two cancel out. We can call the trade date event a "pseudo cash" transaction, or an "anticipated cash" position, or whatever you wish, but something is needed.


Thursday, September 6, 2012

Time for a brief survey

Our firm's COO, Patrick Fowler, recently asked us to answer this question:

What are the top five struggles performance departments face?

Before sharing with you our responses, I thought I'd ask YOU to respond. And to encourage you to do so, we'll offer a prize: all who respond within the next week will have the opportunity to win a copy of our latest two books: The Handbook of Investment Performance and The Spaulding Group's Guide to the Investment Performance Standards. And everyone who responds will get a copy of our very popular Formula Reference Guide.

Simply email your response to me at, and include your address. I will announce the winner and list all the "struggles" offered, as well as those that we came up with, in about two weeks.

Wednesday, September 5, 2012

To rebalance or not to rebalance your benchmark

I was recently interviewed by Money magazine on the subject of benchmark rebalancing. Let's say your strategy is 70% equities and 30% bonds, and you are using the S&P 500 for the equity component and the Barclay's Agg for bonds. At some point, because market conditions have shifted, you underweight stocks, overweight bonds, and put some of your money into cash, so that your portfolio is now 40% stocks, 50% bonds, and 10% cash. Do you (a) introduce a cash index into the mix and (b) rebalance?

This is the difference between tactics and strategy. If your long term strategy is 70% equities and 30% bonds, and this tactical move is temporary (however we define "temporary"), I'd say that you leave the benchmark as it is. The main reason is that THIS is your strategy and you want to be able to determine if the tactical move was a good one or not. If you changed the makeup of the benchmark and rebalanced, it would be more difficult to assess whether or not the shift was a good one.

Here's another example: you're entirely in stocks but have decided to avoid the financial sector for the next few months: should your index reflect this shift?

The answer: No! If you make the index ex financials, then you won't know if this tactical move was a good one or not.

I recall a few years ago, Frank Sortino spoke of a manager who invested in Japan and who had superior performance, but had a high tracking error. The reason for the high tracking error: he avoided Japanese banks, thus the makeup of the portfolio was significantly different enough from the benchmark to produce this large tracking error. A prospective client liked the performance but not the tracking error. The manager's reply: well, we could invest in some bad banks if you'd like. Wrong answer! The right one would have been to rerun the tracking error against the index, ex financials, to demonstrate how the investor did against the index with the same mix; but this would only be to mollify the prospective client's concerns about the high tracking error, and to clearly demonstrate its source. He could go further and provide attribution that would highlight where the outperformance came from. But the index, for comparison purposes, should remain with financials.

Tactics vs. strategy: it's important to keep these points in mind when considering changes to the benchmark.

Tuesday, September 4, 2012

What happens to your GIPS presentation when you no longer need supplemental information?

A GIPS(R) (Global Investment Performance Standards) verification client sent me this question, just before our Labor Day weekend break (and I'll paraphrase): if we change or remove supplemental information, must we disclose it?

Neither the Standards nor the Supplemental Information Guidance Statement speak directly to this matter, so it's up to us to interpret.

My initial response: The removal of any supplemental information does not require any disclosure; since it is optional, adding or removing supplemental information can be done as you feel appropriate.

I quickly followed this up with: That being said, including an item only when it looks good and removing it when it looks bad, would be, I believe, in conflict with the“spirit” of the Standards. I am not suggesting that this is what you are doing; rather, simply adding further “color” to my answer. The Standards do not specifically speak to items being added, removed, or altered, and so we are left with interpretations. If an item thought to be of value is later determined to not be is clearly justification for its removal; but in reality, any justification can be used.
The Standards are not intended to be prescriptive, though there are times when it may seem they are. In general, they strike a balance between being overly detailed and overly broad. Thus, there are times when one is forced to interpret the rules. Keeping in mind "the spirit" of the Standards can be a helpful guide. One might add this question "what would our clients or prospects think if they found out that we ...?" This, too, can help.

Other thoughts or ideas? Please post below; thanks!