Benchmarks: the good, the bad, and the ugly

A Wall Street Journal article spoke about high school graduating students who are "saddled" with being declared "most likely to succeed." One such individual who earned this title stated that she has "been constantly evaluating [her] success and using that silly award as a benchmark." And quite a benchmark it must be, no doubt.

At a recent Performance Measurement Forum meeting, we touched on hedge funds and their use of benchmarks. The key here is that the managers are not managing against these benchmarks, but rather use them only for reference purposes.

Benchmarks are critically important, in all aspects of life. And while being known as the graduate who is "most likely to succeed" might be a challenge, we no doubt compare ourselves to others.

Our younger son, Douglas, has become quite an athlete and participates in various events, like the Tough Mudder (and I thought the Army's obstacle courses were tough!). He told my wife what his time was for his first such event, and she thought it was a good one (any time would have sounded good to this proud mother); I, on the other hand, wondered what it meant relative to others, because without a benchmark, such as mean, median, high, low, it's difficult to judge (oh, and his time WAS very good). But a number by itself means little.

A lot can be said about benchmarks, and more will be ...

Is it "material"?

GIPS(R) (Global Investment Performance Standards) compliant firms are now required to have an error correction policy. This calls for firms to establish rules for materiality, something many struggle with from a definitional perspective.

The CFA Institute's Standards of Practice Handbook provides a definition of this term in relation to "material nonpublic information": "Information is 'material' if its disclosure would likely have an impact on the price of a security or if reasonable investors would want to know the information before making an investment decision. In other words, information is material if it would significantly alter the total mix of information currently available regarding a security such that the price of the security would be affected."

Might this not serve as the basis for a definition of materiality relative to errors? Perhaps "Errors are 'material' if their disclosure would likely have an impact on the assessment of the composite or strategy, or if reasonable investors would want to know the information before making an investment decision. In other words, errors are material if they would significantly alter the total mix of information currently available regarding a composite, such that the assessment of the composite would be affected."

Thoughts?

Anniversaries & milestones to celebrate

In the current issue of The Journal of Performance Measurement(R), we have an interview with Dean LeBaron, founder and former chair of Batterymarch. The reason for his selection is that he was a member of the FAF's (Federation of Financial Advisor's) Blue Ribbon Committee that worked on the first performance presentation standards (which turned into the AIMR-PPS(R) and arguably GIPS(R)). This year marks the 25th anniversary of the group's formation, and we thought it fitting to honor the occasion with one of the surviving members. If you would like to receive a complimentary copy of the interview, please contact our editor, Douglas Spaulding.

Speaking of the Journal, it's in its 15th year, which is quite a feat. We have published so many great articles over the years, and have had the pleasure of interviewing so many notable individuals. Many thanks to our editorial staff, advisory board, authors, advertisers, and subscribers, for their support and contributions. I will shortly interview Howard Marks of Oaktree Capital Management, who joins the list of several portfolio managers who have shared their views. Our interview will focus on much of what he presented in his most recent book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor. In his book, Howard devotes considerable space to the topic of risk, so I look forward to exploring this subject further with him.

Last week we held the 50th meeting of the Performance Measurement Forum. This milestone coincided with the Spring meeting of the European chapter, which was held in London. The group has grown considerably over the years, with representatives from some of the leading investment firms, custodians, and software vendors as members. Once again, our meeting was filled with a great deal of sharing and dialogue.

A lot to celebrate!

43% of CIPM Expert Exam Candidates Pass!

We just learned that the scoring for the most recent test session for the CIPM (Certificate in Investment Performance Measurement) has been completed, and the results are that 43% of the 185 individuals who sat for the Expert Level passed. At the Principles level, 51% of 276 candidates passed. Candidates came from 31 countries.

As a long-time supporter of the program, I am pleased with these numbers for a few reasons: first, to see the breadth of countries represented is impressive. Second, the fact that less than 50% passed the expert says that it's becoming more challenging, which is arguably a good thing. The CIPM reflects a high degree of expertise in our profession, and  it should be both comprehensive and rigorous, which it is.

We congratulate those who have achieved the CIPM designation and those who passed the Principles level, and can now move on in the Fall to take the Expert. And, we encourage those who weren't successful to try again. You may want to avail yourselves of our firm's preparation courses. John Simpson, CIPM teaches them, and his students always comment very positively about how good they are. In addition, we offer Flash Cards which can also be quite helpful in the preparation process.

Client reporting standards: are they necessary?

At last month's PMAR (Performance Measurement, Attribution & Risk) IX Conference in Philadelphia, PA (USA), Beth Kaiser, CFA, CIPM of the CFA Institute informed our attendees of the initiative that is underway to develop client reporting standards. And this week in London, at PMAR Europe II, Stefan Illmer, PhD did the same. I have great respect for both Beth and Stefan, and appreciate their sharing of many of the details of this project.

Last night at dinner, I was reminded by my friend Steve Campisi, CFA that at one time I supported seeing such guidance being developed (perhaps I was suffering from a senior moment in not recalling this). In reality, I do support guidance, though not standards, and not promulgated by an institution of the CFA Institute's stature.

My concerns can be boiled down to: what will the added costs, in manpower and money, be for firms to become "compliant" with these standards and to have their compliance reviewed independently by an independent verifier?

I have a great deal more to say on this topic, but will save it for this month's newsletter, when I will also share some of the key details about this initiative, something all asset managers, especially those compliant with GIPS(R) (Global Investment Performance Standards) should be aware of.

Total Strategy Assets

I conducted a pre-verification for our newest London client yesterday, and they asked a very interesting question: can they disclose their "Total Strategy Assets," along with the composite and firm assets, in their GIPS(R) (Global Investment Performance Standards) composite presentations?

The answer (drum roll please): of course! Why not?

Let's say they have an emerging markets equity strategy, but for various reasons have more than one composite for it. Thus, they would show a prospect the composite that best aligns with their needs, but in reality they manage more in the strategy then shown in the composite assets field. Wouldn't it be beneficial for both the prospect and the firm to disclose this? I would say "absolutely!"

Great idea!

Alphabet soup ... does it really matter?

I stumbled upon an article I had saved from The Wall Street Journal, April 24, 2006 issue titled "Alphabet Soup," by Karen Hube. The subtitle reads "Financial advisors are adding more titles to their business cards. Do any of these labels really matter?

Great question. Do they? Well, I won't comment on the ones for financial advisors, but will for performance measurement professionals. Yes, the CIPM (Certificate in Investment Performance Measurement) really does matter.

It further strengthens our profession; and, it enhances your own stature, identifying you as someone who has achieved a high level of valuable knowledge.

And so, I have but one question for you: if you haven't gotten yours, yet, what's holding you up?