Account minimums: when to remove accounts, when to add them, to GIPS composites?

GIPS(R) (Global Investment Performance Standards) compliant firms routinely establish minimums for accounts to be included in composites. The minimum is the threshold, below which, the account is not representative of the strategy.

But when should an account that falls below the minimum be removed? Or, if it rises above, be added?

Many firms test only at the beginning of the period: if the account is above at the start of the month, it will be in the composite for the full month. But this can be problematic. For example, one of our verification clients had the following situation:

This particular composite has a $1 million minimum; clearly, the account is above at the start. BUT, at some point during the month, most of the assets left. Granted, if the firm has a significant cash flow policy, the account would be removed for that reason. But, if it doesn't, should it come out because it fell below the minimum? I would say, "yes!"

The test should be at the start and end of the period. If the account is above at the start and end, it should be in the composite, but if it is below at either the start or end, it should be excluded.

Nested Attribution

Reminder: there is still time to sign up for this month's Spaulding Group webinar, which is on "nested attribution" (aka, balanced attribution).

Tricia Nelson, CIPM and I will discuss common challenges, and a method that works!

Please contact Chris Spaulding or Steve Sobhi to sign up!

Spreadsheets as systems ... not always such a good idea

I came across a recent Forbes blog post about the shortcomings of spreadsheets. This is something we've addressed here, as well, and seeing it inspired me to once again add some comments.

This post mentions the apparent use of spreadsheets to calculate Value at Risk (VaR). It speaks of the process being "time consuming," which is one of the problems I typically identify in their the use as "systems" (other problems include them being error prone (also mentioned here), cumbersome, and that they're not databases, thus getting to the data is a challenge).

The post references the need for rules, and yes, we've touched on that, too. Firms should have policies in place to ensure that spreadsheets' use is controlled and monitored, just as any other system would be. Sadly, the rules aren't always followed.

The Spaulding Group's operations review includes an assessment of the use of spreadsheets. While the Excel is very powerful, using it for "systems" can create huge problems.

The piece references various software that firms can use in conjunction with Excel. One, XLeratorDB, extends the spreadsheet logic into SQL, which may prove a good solution for some. We will explore this, and other software, in the coming months. We'll let you know what we discover.

What can GIPS compliant firms do with their advisory assets?

A client sent me a note recently asking how they can incorporate their advisory assets' performance into their GIPS(R) (Global Investment Performance Standards) materials. It is becoming clear that the market sees appeal in UMA (Universal Managed Account) platforms, where the advisor provides their model and updates to another party, who in turn finds clients and implements the model for them. This is different than the SMA (Separately Managed Account), aka "wrap fee," where the manager directs the trading for their clients.

By definition, advisory assets are non-discretionary: from a LEGAL perspective, not from a DISCRETIONARY one, meaning that the assets are not to be included in the firm's "AUM" (assets under management). Even if the manager has great confidence that their model is being fully implemented in a timely manner, the  assets remain advisory.

That being said, there are ways to showcase this part of a manager's business.

First, the firm CAN create composites, if they want. But these composites are not "GIPS" composites, and would have to be labeled as "supplemental." These documents should also clearly indicate that the assets are "advisory." I would expect additional language is needed, that indicates, for example, that the manager does not control the timing of the trading, and cannot be assured that their models are implemented completely; also perhaps that the portfolio may include securities that are outside the manager's model. I would think a firm's compliance department can construct appropriate disclosure language. Note that these composites should not be included in the firm's "list of composite descriptions." I would also recommend that the materials' format not be identical to the firm's compliant materials, as this might suggest an attempt to make them appear to be GIPS composites when they are not. They should have a distinctive look, so the recipient isn't confused or mislead.

Second, the firm can show their "assets under advisement," along with their "assets under management." This, too, is supplemental.

It makes sense that firms want to provide some visibility into this segment of their business. Perhaps the GIPS Executive Committee and/or one of its subcommittees can come up with something that addresses this formally. Here are my views, at present. Your thoughts and ideas are invited.

Grammar counts ... or should

My high school English teachers could give testimony to my general dislike for the subject. I actually believed that as someone who had a natural affection for mathematics, it was expected that I would detest and far from excel in English, grammar, etc. And  when I got my bachelor's degree, I was sure that I'd never be forced to do any writing again; boy, was I wrong! I was in the Army only a short time when I learned that I'd be writing memos, training lessons, and much more. Several years later, I discovered I liked to write, and so invested a fair amount of effort to improve my own grammar, though I know I occasionally make mistakes. I recall my friend, Herb Chain, subtly trying to let me know that it was wrong for me to say we would insure that something would occur (i.e., it should have been ensure).

My younger son, Douglas, who is the editor of The Journal of Performance Measurement(r), posted this on Facebook:

I'll confess the occasional onset of a grammatical error allergy when I see exceptionally bad cases, especially in advertisements.

It's my contention that we are all doing a lot more writing than our parents, and much more than we would have expected. Even if you're not writing articles or hosting a blog, you're probably still posting on Facebook, Linkedin, and other "social media" sites. And, you're probably occasionally penning memos and letters, as well as loads of emails.

I was fortunate in high school that I took a typing class. Back then, men (boys) weren't often seen in these classes. A friend of mine and I "goofed off" during the first few classes, so the teacher separated us. This forced me to "buckle down," and I learned that I was pretty good at typing.

My typing skills paid off, though I was once criticized for typing a letter, when I should have had one of our department's secretaries type it (this was before word processing became so common). This same individual and I ended up at a different company, several years later, and on more than one occasion I spied him typing into his PC's word processor; this software has, no doubt, altered the way letters are composed, and made typing something everyone should be skilled at.

As a result of all this crafting of written communications, we're forced to confront some of our weaknesses. Fortunately, word processors (I still prefer WordPerfect) have spell checkers, and some even check grammar. But it's still up to us to ensure that what we're composing is written properly. We should take pride in what we compose, even if it's a short email to a friend, or a post on Facebook.

I recall reading a friend of a friend's criticism of one of our former presidents on Facebook, saying how "stupid" he was. Her composition had multiple grammatical errors, including the use of the plural form of a word, rather than possessive (i.e., the apostrophe was missing). To quote Forrest Gump, "stupid is as stupid does."

I will freely admit that I could benefit from a proof reader to check all of my compositions, but this simply isn't possible. Depending on what's being written in our firm, a document may be reviewed by three or more folks. But even after these checks, there's still the potential for errors. But, we still strive for perfection.

Cartoon has been reprinted with permission, http://www.explosm.net/.

Unless you know the rules, how can you get it right?

A Facebook friend of mine responded to the following mathematical puzzle:

To learn that you have to be a genius to solve it can cause some anxiety. But in reality, it's quite simple, though most of those who tried got it wrong. Most people, I fear, are either uncomfortable with algebraic expressions or forget what they were taught. It's handy to recall the mnemonic, Please (parenthesis) My (multiplication) Dear (division) Aunt (addition) Sally (subtraction).

You don’t do a mathematical expression like this from left to right; rather, you evaluate what is shown to decide the order.

0 + 50x1 - 60 - 60x0 + 10

Multiplication, first, so 50x1 =50 and 60x0 = 0
And so we then have:

0 + 50 - 60 - 0 + 10 = 0

Don’t believe it? Go to Excel and key in =0+50*1-60-60*0+10 and see what you get.

Seeing so many get this wrong suggests that most people simply go from left to right; but that’s not the way math works.

This same page offered a similar puzzle:

While their claim that 92% fail seemed to be high, given the number who responded and got it wrong suggests that it's probably about right. Again, we evaluate the expression before trying to solve; don't just go from left to right.

There are fundamental rules in mathematics, that if not obeyed, yield incorrect results. Likewise, we have fundamental rules in performance measurement. Disobey and you will err.

Dealing with nested attribution

Tricia Nelson Bailey, of Waddell & Reed, and I will conduct a webinar later this month (February 26, @ 11 AM EST) on nested attribution.

What we mean by nested attribution is the case where the attribution is done down to additional levels. Typically, we see two levels: portfolio and, for example, sector, or asset class. If you want to include lower levels (e.g., subsector), you will typically run into one of two problems:

• you get non-intuitive results
• the subsector effects don't add up to the sector effects.

Both can be discomforting.

We will address these challenges, and offer a solution, which we think will prove to be very helpful. To learn more, contact Chris Spaulding or Steve Sobhi.