A few sessions at last week's GIPS(R) (Global Investment Performance Standards) conference provided some insights into work, under development. I mentioned yesterday the presentation on pooled funds. There were also sessions on (the often talked about here) client reporting "principles" initiative, as well as on risk.
The conference employed devices that allowed the attendees to "vote" on various questions that were posed. I did not see them employed extensively, but found them to be an interesting way to gain feedback from those hearing the presentation.
It would have been great, in my view, had the attendees been asked what they thought of various ideas being considered. For example, "do you favor requiring firms to provide composite presentations to prospective fund shareholders?," or "do you favor reporting standards?," or "do you want to see risk standards beyond what is required today?" Such information might be helpful as these documents move forward.
It is always good to know what is in the works. This allows us to be prepared so that we can make sure we offer our views. I will keep you informed as I learn more.
The opening session at this year's GIPS(R) (Global Investment Performance Standards) came along with some unexpected scary stuff.
The topic was pooled funds, and the speakers (Annie Lo and Ann Putallaz) provided us with some insights into a guidance statement (GS) that is being drafted. The GS, while not yet finalized, will purportedly require compliant managers of pooled funds (including mutual funds) to provide all prospective shareholders with the composite presentation that the fund is in. In fact, it was suggested that since nowhere in the Standards do we find an exemption for shareholders, why would one not already be doing just this? That is, it is a belief of some that this is, in reality, a requirement today!
This, in and of itself, is scary enough. I will have a lot to say about it in this month's newsletter (unexpected fodder, I can assure you). To put this into some perspective, several folks came up to me afterwards, asking what I thought of it: no one seems eager to see this idea come to fruition. Some suggested that it would cost a great deal, and result in much added work and confusion, with no discernible benefit.
For me, the scariest moment was the response to one of the questions I submitted: if it is true that compliant firms are required to make these materials available, does it therefore also mean that they are out of compliance? The response: "technically, yes."
Imagine what this message means. If you are at the conference and manage mutual funds, and know that your firm does not make any effort to provide compliant materials to prospective shareholders, you are "technically" out of compliance. Do you (a) immediately contact your compliance officer to warn him/her, (b) return and assemble the key folks to tell them of this, (c) insist that the firm stop claiming compliance, or (d) ignore this for now? If you do anything but stop claiming compliance, are you putting your firm in the awkward position of committing fraud? That is, are you knowingly allowing your firm to continue to tell folks you're compliant, all the time knowing that you are "technically" out of compliance? This is serious stuff.
But calmer heads prevailed ... at least, for now.
Jonathan Boersma, who moderated this panel, suggested that if the firm considers the prospect to be the fund, and provides its board with compliant materials, then they are in compliance.
Hear, hear! Bravo! Yes; I agree!
And of course, this therefore requires us to ponder why is anyone suggesting otherwise? In the IPC (Investment Performance Council; the predecessor group to the GIPS Executive Committee) days, I recall brief discussions on this topic; that is, who is the client? We seemed to be in agreement, though failed to write it down, that for pooled accounts, the broad account was the client. Why would we ever think that the shareholders are, for GIPS purposes? Why would we think it necessary or prudent or worthwhile to provide prospective shareholders with presentations?
Again, I will have more to say on this in our newsletters.
Four of us from our company (Chris Spaulding, Jed Schneider, and Steve Sobhi are joining me) are in beautiful Boston for the annual GIPS(R) conference. As we have for roughly the past 15 years, we are sponsoring this event. I didn't attend last year, and was told that I was missed, so I have returned!
I don't know if I'll report on much, but if something significant occurs, I will.
A question came up today (pre-conference) that I thought was interesting, though: must a compliant firm provide a composite presentation to an existing client?
There are two cases where I think this would apply (oh, and "yes" is the answer):
If the client asks for it. Would you REALLY consider denying such a request? That wasn't difficult, right?
If the client assumes the role of a prospect. By this I mean if an existing client is interested in another strategy the manager offers. For example, if the manager handles large cap growth, and the client is interested in considering the manager to handle their mid cap growth sector. The client is really now a prospect, at least for this new strategy, and therefore is entitled to the same treatment as any other prospect, and the manager is obligated to provide them with the materials they would for any other prospect.
How hard is that?
I actually think that the changes made to the 2010 version, where the definition of client was broadened, may have added some confusion; unintentional, of course. I guess you could ask "When is a client not a client? When he/she is a prospect."
Probably sparked by (a) my discovery of the TV show, The Big Bang Theory, and (b) the fairly recent news about the Higgs boson, I recently began readingLeon Lederman's The God Particle. Mind you, I have JUST begun, but already stumbled upon something that I found I could use ... and I'm using it here!
In his definition of "The aether," he wrote "Discredited and discarded by Einstein, the aether is now making a Nixonian comeback."
I immediately thought of my friend, the Internal Rate of Return (IRR): it is making a Nixonian comeback, too. It had ben discarded by virtually the entire investment world in favor of time-weighting. Like Rodney Dangerfield, it got no respect. But alas, it is creeping back, most recently with the introduction of the GIPS(R) guidance statement for asset owners that recommends its use. Excellent!
And while perhaps the IRR, if it was an actual being, might not like being compared with "Tricky Dick," it would still rejoice that it is finally "getting its due" and once again, gaining some respectability. Hurrah!
A few years ago, when our younger son, Douglas, began to participate in the "Tough Mudder" events, he called to tell us how he did. He told my wife that he finished in, as I recall, something like two hours. My wife responded with great pride.
When she communicated this information to me, she was a bit surprised by my reaction: while it wasn't quite "so what's your point?," it was definitely not the enthus- iastic reply she anticipated. I wanted to know his time within some frame of reference: perhaps what the ave- rage time was, or the range of times, or, the average time for men who competed, or the average time of men in his age group. When I learned some of this I respond- ed with pride as my wife had (perhaps the additional information really didn't serve any value; or, perhaps she knew more about these events than she let on).
Statistics are useless information
without a frame of reference
I think you'll agree that this is a valid statement.
Now, permit me to gloat a bit about my son, before moving on. He has now participated in more than a half-dozen Tough Mudder events (including the "World's Toughest Mudder" (a 24-hour event)), a couple Spartan races, a marathon, and numerous other races. Next weekend he will be in a 28-mile Spartan Race he had to qualify for (to put THAT into perspective, a couple weekends back he was in a regular Spartan event and his time, coincid-entally, was about two hours (2:07:01, to be precise); he finished 215th out of a total field of almost 3,500 par- ticipants. The event next weekend will only have around 400. Pretty good, I think, for a fellow who didn't do any sports in school (he's the actor in the family) and only recently discovered that he's a pretty good runner and obstacle course lover.
Well, enough of that. So, what's my point? I kind of made it, I think: statistics without a frame of refer- ence are useless information. But so often we are exposed to examples of numbers being tossed about without any reference, are we not?
To be given a statistic, all by itself, without the benefit of a frame of reference (again, it can be an average, a range, or similar information), serves no (or at most, limited) purpose. Thus, the reason why in our industry we insist upon seeing benchmarks of some sort. An important thing, of course, is that it's relevant.
I recall in early 2000 seeing a full page advertisement of a mutual fund company celebrating the fact that 29 of their funds outperformed the S&P 500 in 1999. Putting aside the fact that we weren't told how many of their funds failed to accomplish this feat, the list of funds that did included their Large Cap Growth, Euro Develop- ment, Small Cap Opportunity, Global Aggressive Growth, and International Equity funds. None of these would normally be compared with the S&P 500; knowing that they outperformed is, in a word (actually two words), useless information. Well, almost useless, as I guess knowing this is good from a broad perspective, but doesn't say a whole lot about the success of their large cap growth, etc. managers relative to their respective sector indexes.
To avoid touting useless information, we need a bench- mark or two, but it (they) has (have) to be relevant, unless they're being shown not from the standpoint of this is how we did but rather in case you were wondering, this is how other markets performed.
And yes, both my wife and I are proud of our son.
p.s., Totally aside from anything to do with perform- ance, I want to comment on one use of notation. I have the following above:
so what's your point?,
that is, a question mark followed by a comma.
I read a year or so ago about the possible introduction of new forms of punctuation which has, instead of the dot, a comma with the question mark:
I can create this character using the "overstrike" feature of WordPerfect (yes, I use WordPerfect, not MS/Word, but that's a topic for another time), but if I were to use it, how would readers respond? It's not yet "officially endorsed" notation. But I think it's a great idea. A similar figure may be introduced for the exclamation point.
p.p.s., I also used "statistics are" not "statistics is." I happen to think the latter sounds better, but I confirmed that it's more correct to have the former.
p.p.p.s., Can't make out the details in the above table? Just click on it.
I'm probably beating a dead horse, but will persevere, regardless.
This past weekend's WSJ had an interesting article by Stephen Hawking ("A Brief History of a Best Seller"), in which he discusses his famed book's origin. His editor pestered him to make it more readable (which actually was Dr. Hawking's objective, as he wanted a book that could reach the masses).
I found the following of interest: "I am sure that nearly everyone is interested in how the universe operates, but most people cannot follow mathematical equations. I don't care much for equations myself." (emphasis added) Wow! "I don't care much for equations myself."
He continues "This is partly because it is difficult for me to write them down, but mainly because I don't have an intuitive feeling for equations. Instead, I think in pictorial terms, and my aim in the book was to describe these mental images in words, with the help of familiar analogies and a few diagrams."
Hawking and I are in agreement on the benefit of using "images in words," "familiar analogies, and "diagrams" to communicate ideas.
In our training classes, for example, we use the following graphic to discuss attribution's effects:
I believe Andre Mirabelli may be responsible for it. I think it's a great way for folks to picture how the effects are derived.
To explain "macro attribution," I came up with
to demonstrate how the contributions to return are arrived at using Andrew McLarin's fixed income attribution model.
We use a series of graphics, culminating in
to contrast the differences between the way Brinson, Fachler and Brinson, Hood, Beebower derive attribution.
I love metaphors, and use them frequently. And, I even cite a few episodes from Seinfeld and an occasional Doonesbury comic strip to communicate ideas.
Hawking isn't saying that formulas aren't needed, because they clearly are; however, there are often better ways to communicate ideas than relying solely on the math.
I love dictionary.com; it has a "word of the day" which is often one I'm unfamiliar with. While many are words that fail to inspire me, some do.
A few weeks ago, battology was the word they introduced.
What a great word! I knew at first it was one I'd like.
When I review letters and other documents we produce, I often discover word repetition that is unnecessary. I saw it today in today's WSJ (and, just provided an example of wearisome and unnecessary word repetition ... I could have done better, right?). In an article on the Yankee's (my wife's favorite team, by the way) titled "The Yankees' Real Rival" we read "Joba Chamberlain had a rough night that night." Must have slipped by the editor. First, the "that night" could have been dropped, as "that night" (Thursday's, to be exact) had already been established. Or, if it was felt that these two words were needed for clarity, than "rough time" would have avoided the dual appearance of "night" in the same sentence, and oh, so close together.
I love the saying that "there is no such thing as writing, just rewriting." For it's in the rewriting that we usually discover the presence of battology. Great word, right?
I recently conducted a "non-GIPS(R)" verification for a client's sector returns. They have sliced up their portfolio in a dozen ways (e.g., U.S. growth and value; small, mid, and large cap; emerging markets) and presented returns for a multi-year period. They chose to include cash, which they allocated to each segment. My question: should the cash be there?
I asked our client if these segment returns were to:
a) represent these sub-strategies as being independent, so as to suggest that this is how they would have done had they been managed separately (e.g., a U.S. growth strategy, a U.S value strategy), or
b) show how each segment did as part of the portfolio (e.g., this is how the U.S. growth stocks did, this is how the U.S. value stocks did)?
They said that the latter applied. That is, not to hold the results out as if this is what would have been obtained by managing separate strategies, but rather to show how the different components of the portfolio performed.
This seemed to make sense, given that there were times when there would be only a single security in the segment (and at times, no securities), which I think unlikely for a separately managed strategy.
Therefore, in my view, to include cash would muddy the results. While our client referred to the cash inclusion as being a "cash drag," of course there would be times when cash might actually boost performance (think 2008, 2009).
Regardless, if, as a client, I'm interested in knowing how components of my portfolio did, I wouldn't want the inclusion of something else that would alter the results. Make sense?
We have known Mark a long time, and respect and like him a great deal. We know that he will be a great addition to our team, and are anxious for him to join us.
This new position demonstrates our commitment to the European market, and our desire to expand our services into this region. We already have several GIPS® verification clients there, hold the number one performance measurement conference in Europe, have hosted the European (now EAFE) Forum there for close to 15 years; and many of the purchasers of our books and subscribers to The Journal of Performance Measurement® are based in Europe. In addition, we have conducted both in-house as well as open-enrollment training and provided consulting to several European clients With Mark's assistance, we look forward to offering our services and products to even more institutions in the region.
"Ronald Coase, who died on Labor Day at age 102, was one of the most unusual economists of the 20th century. He won the Nobel Prize in 1991 for his insights about how transaction costs affect real-world economies. In a 75-year career he wrote only about a dozen significant papers, and he used little or no math.
Yet his impact was profound."
The ability to convey economic, as well as financial and investment, ideas without the aid of mathematics is important, though we cannot lose sight of the importance of numbers. In the brief paragraph above, note the number of numbers that appear (102, 20, 1991, 75, 12)!
What actually served as the genesis of this piece were two events that were highlighted this past weekend.
The first was about Thomas Merrick, someone no doubt unfamiliar to most folks. He spent 65 years working for a railroad and just retired at age 91. He was a World War II veteran. This article
impressed me because of this individual's desire to continue to work, long past the time when many retire (at the present time I have no plans to retire, and so glory in such stories). Here we learn how long he worked (65 years) and his age at retirement (91). Numbers are the way we convey important facts; to say that this "old guy" finally retired after working for "a long time" is lacking important details. Without numbers, we're unsure about how old he was and for how long he worked; plus, one might find the characterization a bit insulting.
The second is about Diana Nyad, the 64-year old woman who swam from Cuba (my mother's birthplace, by the way) to Florida, through shark-infested waters, without a cage; the first person to do
this. She covered a distance of roughly 110 miles in 53 hours, and this was her fifth attempt. Again, we see the use of numbers to provide key details about this woman's feat. Would the story be as good without them? Hardly.
Math matters ... a lot.
Someone posted the following puzzle on LinkedIn:
Well, I guess I am a bona fide genius, as I solved it in less than two minutes. But seriously, only one out of 100 folks can? I'm a bit suspicious about this claim. Granted, it does require some degree of analytical skill, but I'd be surprised if the actual number wasn't higher. And, to suggest that by solving it you're a genius is a bit hyperbolic, no doubt.
Although my fondness for mathematics has been part of my DNA forever, I also value the ability to communicate without and/or about the numbers in a meaningful way. I think for many performance measurement professionals, this can be a challenge. At next year's PMAR conferencesThe Spaulding Group will have sessions on this subject: the ability to add insight to the performance measurement results.
I think this is a critical part of being a performance measurement professional; i.e., it not just about the numbers. (Okay, it's mostly about the numbers ... Or perhaps not! A debate topic, perhaps!)
p.s., Speaking of geniuses, I like this quote from Polish-American mathematician Mark Kac: "An ordinary genius is a fellow that you and I would be just as good as, if we were only many times better. There is no mystery as to how his mind works. Once we understand what he has done, we feel certain that we, too, could have done it. It is different with the magicians … the working of their minds is for all intents and purposes incomprehensible. Even after we understand what they have done, the process by which they have done it is completely dark." Our industry is blessed to have both "ordinary geniuses" as well as a few "magicians."
is an internationally recognized authority on investment performance measurement. He's the founder and Chief Executive Officer of The Spaulding Group, Inc. (www.SpauldingGrp.com), and founder and publisher of The Journal of Performance Measurement. He's the author, contributing author, and co-editor of several investment books. He's actively involved in the investment performance industry, serving on numerous committees and working groups.
Dave earned his BA in Mathematics from Temple University, his MS in Systems Management from the University of Southern California, an MBA in Finance from the University of Baltimore, and a doctorate in Finance and International Economics from Pace University.
For more information please visit www.spauldinggrp.com/the-company/david-spaulding.html
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