Is the sun setting on your disclosures?

The GIPS 2010 Exposure Draft sought to obtain a consensus to build a case to establish sunset provisions for certain required disclosures (e.g., name or strategy changes to composites) for GIPS(R) (Global Investment Performance Standards). And we are aware that some firms have implemented them in their policies. However, just to make it very clear, they do not exist!

While the GIPS Executive Committee hoped to establish them, because of the limited feedback they received, none resulted, none exist. Therefore, any disclosure shown as being required in the Standards is required forever, or until it no longer applies (e.g., if a change occurred for a year that is no longer reported, because it happened more than ten years ago, then one can arguably remove it, but not if that period is still shown on the presentation).

Any verifier who allows their clients to establish sunset rules is, in my view, doing their client a disservice, not a favor, since there is no basis for this. That's my interpretation, but I'm open to others'.

Goldman Sachs & Currency Attribution

In yesterday's Wall Street Journal, the editorial writer Holman W. Jenkins, Jr. wrote a piece about Goldman Sachs, explaining how they, and their chairman, Lloyd Blankfein, are being vindicated, as the SEC's attempt to shift attention from their (the SEC's) failure to catch Bernie Madoff, to a highly successful firm and individual, is faltering. This is sadly reminiscent of the government in Ayn Rand's Atlas Shrugged, where this populist strategy, to assign blame and negative attention to the successful firms and individuals, is an easy one to employ, as the public often seems willing to damn these targets, which can be akin to killing the proverbial goose that is laying our golden eggs.

And so, what does this have to do with currency attribution? The proper assignment of blame (and credit).

I was speaking with a client recently who explained that because they don't manage currency, they do not do currency attribution; rather, they use the basic Brinson Fachler (BF) model that only shows allocation and selection (they avoid interaction) effects, based on the base (US$) returns in their global and international portfolios. I suspect that many other firms hold to this same approach. And so, is there anything wrong with it?

Well, consider what would happen if, for example, we have a stock in Euroland, that had a zero percent annual return (i.e., its price was unchanged for the year) as measured in local (Euro) terms,during a year where the Euro's return relative to the US dollar was up 15 percent. By using the security's base return (15%, which arises solely from the currency change), we are unable to identify the true source for the security's return, and attribute it entirely to its selection.

To properly evaluate a portfolio's performance, when multiple factors are at work (the local dynamics of the security, coupled with the exogenous impact of currency movements over time), we must separate their contributions in our attribution analysis, by using the local (i.e., Euro in this case; not base, i.e., US$) returns in the BF evaluation of market effects, and a currency attribution approach to complete the job, in order to fully reconcile to our excess return, by addressing the impact of currency movements (and the contributions from any hedging we may have employed).

The decision to use a multi-currency attribution model has nothing to do with the management of currencies, but simply the exposure to two or more currencies, and thus the associated foreign exchange movements which occur, independent of what happens to the securities we invest in.

Light bulbs & GIPS Verification

There was an editorial (The Light Bulb Police) in yesterday's Wall Street Journal that spoke of the upcoming ban in the U.S. on conventional 100 watt incandescent light bulbs. One sentence in particular grabbed my attention: "The question an (allegedly) free society should ask is if CFL [compact fluorescent light] bulbs are so clearly superior, why does the government have to force people to buy them?"

It occurred to me that this question could have been offered against the once planned requirement within GIPS(R) (Global Investment Performance Standards) to mandate verifications; in a sense, this was an argument I made, as I believed with confidence that the market would apply a de facto requirement upon firms to undergo annual verifications.

Of course, the GIPS Executive Committee saw the wisdom of not requiring GIPS compliant firms to undergo verifications, because the market has done this for them. I think that this same attitude should be used as a test for future changes to the standards, as many items can no doubt be left to the firms themselves to discover the benefits of.

p.s., I am one of those U.S. citizens who oppose this new law. I have the right today to purchase CFLs, but have decided not to, in spite of the expectation that it might save me a whopping $50 per year. There are disadvantages to CFLs, including the fact that they aren't as bright as incandescent lights; perhaps the same can be said about the members of Congress who voted for the law's passage.

Interesting way to increase your odds of beating the market

In his weekend column for The Wall Street Journal, Jason Zweig points out a method that some advisors have apparently used to outperform (or at least increase their chances of outperforming) their benchmark: simply calculate the return of the index without taking income into consideration. He mentions a few advisors who, for example, compare their performance to the S&P 500 sans dividends. One individual claimed that he was "CRUSHING the S&P 500." Well, I guess it can be a lot easier to do this if you include income in your portfolio, but ignore it in the index.

Fortunately this isn't standard practice. If one choose to do this, we would expect they would include a footnote explaining this practice, but we also shouldn't be surprised if this added detail is overlooked.

The Spaulding Group Hires Jed Schneider

In case you hadn't heard, The Spaulding Group, Inc., has hired Jed Schneider, CIPM, FRM, formerly of Morgan Stanley Smith Barney. Jed is being brought on to head the firm's verification business (GIPS(R)) and non-GIPS), and is titled a Senior Vice President.

Because of the significant growth in this segment of our business, we felt that we needed to take these moves: not only to bring on a highly qualified and seasoned performance measurement professional, but also to have him be responsible for the practice. He will work closely with Christopher Spaulding, SVP of Sales and Client Relations, to build the practice even further.

Our verification model calls for us to only use senior level people, and we believe that this, along with a host of other reasons, has contributed to our recent growth. Our clients range from less than $1 million to over $500 billion under management, and includes US, Canadian, and European-based firms.

We have known Jed for many years, and know that he will work well with our clients. We are pleased that the press release we issued earlier this week has been picked up by at least three industry publications. For further information, please contact Patrick Fowler, Chris Spaulding, or Jed Schneider.

Pension funds and rates of return

A letter I wrote appears in the most recent issue (May 30) of Pensions & Investments, that's in response to a letter Jonathan Boersma wrote (April 18), which was in response to one I had written (February 21), in response to an earlier article (December 27, 2010), regarding pension funds and risk. I should mention that Steve Campisi also wrote a letter (May 16) in response to Jonathan's. Much of this dialogue deals with two primary topics or issues:

1. Pension Funds (and other similar bodies) and their compliance with the Global Investment Performance Standards (GIPS(R))
2. The use of money-, versus (or perhaps more accurately, in addition to) time-weighted returns.

Steve and I (along with a third colleague) are working on an article where we address the former in great detail.  There are benefits to these institutions complying, though there are potential risks as well, given that the standards are intended for asset managers who sell their services to others, including these very plan sponsors (I use this term in a broader way then many, as I think it can apply to not only pension funds, but also endowments and foundations, as well as other similar organizations).

As for the second point, the argument is, perhaps to some, tiresome, while to others one that needs continuous, or at least frequent, attention (see, for example, the Linkedin group dedicated to this topic). I won't repeat myself on this subject here, though this doesn't mean that I am one who has grown tiresome of the topic and its salient arguments.

Please take the time to review Jonathan's, Steve's, and my letters on this topic, as it's an important one, which perhaps needs greater attention and consideration.

NJ Beaches & Performance Software: they have more in common than you might think

The current issue of New Jersey Monthly Magazine has a "shore guide," which ranks New Jersey's beaches. And so, it's not unreasonable to expect someone to ask, "what's the best beach?" But the magazine doesn't say, nor should they, for the "best beach" will depend upon what you're looking for in a beach. The magazine does offer the best:

• Family Fun Beach (Point Pleasant)
• Family Quiet Beaches (Stone Harbor, Bay Head & Sea Girt)
• Secluded Beach (Strathmere)
• Boardwalk (Ocean City)
• Nude Beach (Gunnison Beach, Sandy Hook)
• Gay-Friendly (Asbury Park)

and more, but not a single "best beach." 

And so, what does this have to do with performance software?

We are often asked "what's the best performance system" or "what's the best attribution software," but it always comes down to what your needs are; what you're interested in; what you require. There is no single "best system."

Just as vacationers are interested in certain attributes for the beach they're going to spend time at, software users, too, have certain requirements which need to be taken into consideration.