GIPS 2010

Yesterday, the GIPS(R) (Global Investment Performance Standards) Executive Committee voted on the final version of GIPS 2010, which go into effect January 1, 2011. I will cover some of the key points shortly, both here and in our newsletter. Stay tuned!

Congrats to the EC!

A call for volunteers...

The Global Investment Performance Standards (GIPS(R)) Nominations Committee is seeking volunteers to serve on the GIPS Executive Committee. The GIPS Executive Committee is a nine-member committee that serves as the decision-making authority for the development, interpretation, and promotion the GIPS standards. The GIPS Executive Committee is seeking nominees to serve as chair of the Investment Manager Subcommittee and to represent that constituency within the GIPS Executive Committee. Volunteers must have investment performance measurement and/or evaluation experience, knowledge of the GIPS standards, and the ability to represent the investment manager community of the investment industry. The Investment Manager Subcommittee acts as a forum for investment management firms regarding issues related to the consistent application of the GIPS standards and the identification issues that need further guidance and interpretation.

For more information, please see this month's GIPS Newsletter.

Examinations...the whys and wherefores

No doubt you recall a time when we wouldn't tear off those tags on our mattresses, because to do so would violate the law! We were convinced that there was a special agency (the Mattress Police) who, unannounced, would appear at your bedroom door to inspect your mattresses: God be with anyone who foolishly removed their tags. And the reason why everyone behaved this way? Ignorance. The tag writers assumed everyone would know that the prohibition only applied BEFORE a mattress was sold ... who cared what you did once you got it home!

Well, I liken this behavior to GIPS(R) examinations: why do people get them done? By far, most U.S. firms that claim compliance with the Global Investment Performance Standards undergo examinations: but why? And because so many firms do, does that make this behavior correct?

Our firm is, perhaps a bit unusual in that when we meet with verification clients, especially ones that we won over from competitors, we ask them why they previously underwent examinations. I recall one NYC client who, at one time, had ALL of their composites examined (probably to the tune of tens of thousands of dollars). Then, a few years ago, they decided only to have their "marketed" composites examined. When we asked why they had this done, the basic answer was "well, we just always have; our verifier recommended it." Okay, and so how has this benefited them? Did prospects or clients regularly ask if they had their composites examined? Well, upon further review our client determined that no, this work hadn't been beneficial at all to them. And so, they decided to stop having them done.

Another client, who we won over a few years ago from a "big 4" firm, had previously undergone examinations; we encouraged them to think twice about spending the money (even though it would mean money in our pockets). They decided to stop and have continued to avoid having them done; and, apparently this hasn't cost them any business.

Outside the States, hardly anyone gets examined. And why is this? Well, let's consider the history of examinations. To put it simply, they are equivalent to the old, AIMR-PPS(R) Level II verifications. Recall that the "big 8" (now "final 4") wouldn't do Level I (firm-wide) verifications but would do the Level IIs. And so, if a firm wanted to be verified by one of the "big boys," they had to settle for Level IIs. When the GIPS draft came out, it only had firm wide verifications, but when the first version (1999) appeared, examinations were included. And so, U.S. firms who had always had Level IIs not surprisingly now had examinations done (and today the large CPA firms are willing to do GIPS verifications).

We are aware of at least one of our competitors who is actively trying to convince people to have examinations done. We will be happy to do examinations, too: we ARE a for profit company. But, we don't want to take our client's money if we don't feel that it's being well spent. We'd prefer that they become convinced that yes, they're necessary, and then engage us to do them.

No doubt that the Bernie Madoff scandal can be a justification for having examinations done, but I'd argue only when the client isn't getting reports from third parties (e.g., custodians): recall that Bernie did everything for their clients (how nice), including custody, trading (right!), and management.

If the basis for encouraging firms to undergo examinations is because so many other firms do them, then that's like saying "I won't remove the tag from my mattress because no one else does." Well, be a tag puller! Don't be a lemming! Be convinced that this expenditure truly is an investment and not merely an expense! (As your mother no doubt asked you, would you jump off a bridge just because your friends did?)

We're conducting a "mini survey" to determine what people see in RFPs. We believe that it's unusual to be asked if composites have been examined. The preliminary results suggest we're right; we'll provide more details once they're available.

p.s., Please do not construe this post as an attack at verification firms that offer, recommend, and conduct examinations. This is solely our opinion. I don't feel that verifiers who conduct examinations are unethical, charlatans, self-serving, or anything like that. They offer a service which there is clearly a market for; we just question its value.

Terminology time

It is my profound belief that many folks use words they don't even know the meaning of (I've been guilty of this, too). People have an inherent fear of admitting ignorance, so rather than say "what is meant by that term" and appearing (in their minds) ignorant, they'd prefer to go on pretending they fully understand what's being said.

Sometimes we think we know the meaning, but are wrong. Take the terms "buy side" and "sell side." What DO they mean? What are we buying or selling? Take a moment to think about this before moving on (and ignore the clipart as it probably has no bearing on the topic).

And the answer is (as I open the previously hermetically sealed envelope) leverage!

And what IS leverage? This is a confusing term with different opinions and ideas. Essentially it's the ability to buy or sell something when you want to. Money managers in general buy leverage, while brokerage firms sell leverage. It's not quite that simple, but it's close enough.

Being discrete when we can...

One of the most difficult and confusing aspects of the Global Investment Performance Standards (GIPS(R)) is "discretion." As we know, "discretion" has multiple meanings. First, we have "legal" discretion and then "GIPS" discretion.

I've always viewed "legal discretion" as the starting point to decide if an account is discretionary for GIPS purposes. If the account isn't legally discretionary, no need to move forward. But, that was until fairly recently. We have a new client that has a slightly different twist on this. They will allow accounts that are not legally discretionary to be discretionary for GIPS purposes if the client always takes their advice.

In our classes, we look at scenarios where an account is legally discretionary, but where the client requires the manager to ask them (or alert them) before trading, as a point to consider as to whether or not the account is discretionary for GIPS purposes. If, for example, this legally discretionary account always says "yes, sure, do what you want," then to include it as discretionary for GIPS purposes is deemed fine. However, if there are times when the client may say "no, I'd prefer if you didn't do this trade," then they should consider having this account be non-discretionary for GIPS purposes.

The standards do not specifically address (to my recollection) the issue of "legal" discretion. And therefore, I'm of the opinion that this client's decision to allow accounts that are not legally discretionary to be treated as discretionary for GIPS purposes under the scenario outlined above should be permitted; this view was supported by the GIPS Help Desk, so I am confident in its interpretation.  Discretion is, as I think we agree, in the eyes of the manager, and therefore should be their call. 

And in conclusion a legally discretionary account can be discretionary for GIPS purposes but also may not be, based on the firm's rules. In addition, an account that is NOT legally discretionary CAN be discretionary for GIPS purposes, again, depending on the firm's rules. 

Net-of-fee returns

The subject of net-of-fee returns, as they pertain to the Global Investment Performance Standards (GIPS(R)) came up twice this week already, so I’ll share with you the questions and my responses.

First, I was asked about firms using “model fees” to derive their net-of-fee returns. Is this permitted? I'm unclear as to what a "model" fee is, but would suggest that it probably is NOT permitted. Rather, firms can use the highest management fee “incurred by portfolios in the composite” as opposed to the highest stated fee. It may be easier to use the highest stated fee, rather than try to figure out what the highest fee was. Or, firms may use actual fees, which leads us to the second question.

“Thanks for continuing to keep in touch with us. We appreciate the work that David did for us in the end of 2008, it has helped us tremendously over the past year. We have created our composites and wondered if you or David could give us some guidance. We have calculated both Gross of fee performance and net of fee performance of the composites. We have a dilemma in that the management fees applied to the composite are different for each account. We would like to report ‘Net of Fee’ performance, but feel it’s not entirely accurate to show a ‘net of fee’ composite that has a blended fee lower than the actual fee we will be charging the vast majority of our clients (1.50%). Is it standard practice to accrue a standard fee (i.e. 1.50%) on top of a gross of fee composite calculation on a monthly basis? We want to make sure we are reporting this in accordance with best practices. Can you offer any suggestions in this matter?”

There are actually a few questions here, but I'll summarize. First, I am not a fan of net-of-fee returns to begin with. And, I'm not alone. One only needs to turn to their trustee GIPS Handbook to discover the following, from the Interpretive Guidance on Fees Provisions points out, “the most universal point of comparison is the Gross-Of-Fees Return less the Investment Management Fee that the prospective client expects to pay.” If one shows gross-of-fee returns and tells the prospect the fee they would pay, all they need do is back out the fee to approximate what the net-of-fee equivalent is. A return derived from a blend of fees has little value. As I recall, the AIMR(R) standards once required firms to show an asset-weighted fee when they reported a net-of-fee return, so that they could better gauge what the return meant. Sadly, this requirement was dropped long ago and never made it into GIPS. As for accruing fees, this is recommended, though it can be a challenge for many. My recommendation: only show net-of-fee if you have to as gross-of-fee is better. If you have to show net-of-fee returns, then I recommend using the highest actual fee rather then to use a blend. I would ALWAYS show gross-of-fee, even if you show net.

AMENDMENT!

I had a discussion today (1/27/10) with a colleague who mentioned a Q&A on the GIPS website:

We want to report the net-of-fees performance numbers of a composite. Should we state the actual net-of-fees performance returns for all portfolios which would reflect the deduction of the actual fee paid by each portfolio, or can we use a model fee?

The net-of-fees return is defined as the gross-of-fees return reduced by the investment management fee incurred. Firms are permitted to use either the actual investment management fee incurred by each portfolio in the composite, or the highest investment management fee incurred by portfolios in the composite to reduce the gross-of-fees return to calculate the net-of-fees return.

Funny...the writer uses the term "model fee" but it isn't addressed in the response. And so what IS a model fee? The GIPS Handbook offers no answer. My colleague said it's anything that isn't an actual fee. I would suggest that the ONLY other fee you can use is either the highest used or the highest on your fee schedule, which are both a heck of a lot better then a blended fee. Amen!

2009 Dietz Award Winner Announced

With the recent, though delayed, publication of the Fall issue of The Journal of Performance Measurement(R) came the announcement that Damien Laker won the Dietz Award for 2009.

As you may have heard, Damien passed away last year. While one might think that our board cast their votes simply because of his death, I don't believe that's the case. Damien truly deserved this award. Granted, it was given for a specific article he wrote, but one could look at his career to see how much he contributed to the investment performance industry. He was a prolific writer who contributed greatly to our industry's body of knowledge. He wasn't afraid to voice his opinion and offer creative ideas. He developed a software firm which he later sold to Barra. He was a frequent speaker and was chosen as one of the few industry experts to moderate a performance industry website.

Damien is missed by many, but no doubt mostly by his family and friends. We are pleased that we had the opportunity to acknowledge Damien in this formal way and thank the Journal's advisory board for bestowing this honor on him. Congratulations, Damien!

Adding accounts to composites ... when, exactly?

Firms that claim compliance with the Global Investment Performance Standards (GIPS(R)) are required to have written policies and procedures. And one of these policies should address the timing on when an account is added to a composite. A few thoughts:

We prefer that the timing be based on time (timing, time, get it?). For example, accounts are added after they've been under management for one full month. The advantage of this is that it's fairly easy to track, to make sure the firm is doing this consistently. In addition, you can vary the timing from composite to composite. An strategy in a market that's highly liquid can perhaps have a very short time period; one where it's less liquid may have a longer period. You should include examples (e.g., if the account is added January 22, it goes into the composite February 28). This way there's no argument about what the words mean.

Some firms prefer to have accounts added when they're fully invested. When this is done, the firm has to define what "fully invested" means. For example, "when the account is 90% invested." The problem with this is (a) it's harder to test and (b) it's quite limiting, when the definition changes. For example, during 2009 many managers decided to increase their cash position, meaning that "fully invested" might become 70% invested when it was once 90 percent. Dynamic changes in the definition are difficult to capture, track, monitor, test.

A key point: be consistent.

Valuing for large flows

Firms that claim compliance with the Global Investment Performance Standards (GIPS(R))are now required to revalue their portfolios whenever large cash flows occur. A few points to make:

1. What if you calculate composite returns and use the aggregate method (i.e., where you treat the composite as a single account)? Must you still revalue? Yes!
2. Must you have a firm-wide definition of what "large" is? No! You can have different definitions per composite. You may want a smaller threshold for some and a larger for others. This is fine.
   
3. Can "large" be "too large"? Yes! We recommend establishing a level at 10% or less.
4. What if you revalue daily? Must you still define what "large" is? No. In your case, large = anything above zero (actually, it's zero).
5. Can you revalue on a case-by-case basis for flows below your definition of "large"? No! This would constitute cherry-picking and isn't permitted.
6. What if the composite has separate accounts, that are revalued when flows are above 5%, and a mutual fund that revalues every day. Is this a problem? In theory, yes. In actuality, we believe that clarity will be forthcoming that says that this isn't an issue. That is, if there are accounts (e.g., mutual funds) in your composite that regularly value daily, along with accounts that don't, then as long as you're consistent this shouldn't be a problem. But again, no formal word has come forward, yet, though we anticipate it.
7. Can you change your definition of "large"? Yes, on a prospective (forward looking) basis. You should document what it was, when it changed, and what it is, now. 
8. How do we decide what "large" should be? We recommend that you run some tests against historic data, and try different thresholds for different time periods. See what the results look like and determine what you are comfortable with. The more frequent, the more work.
9. What does "revalue" mean? Good question! (as if the others weren't any good) In our opinion, "revalue" means more than "reprice" (if it meant the same thing, why don't the standards say "reprice"?). To us, revalue means reconcile, too. That is, to ensure that the portfolio's valuation is as accurate as possible.
10. With this new change, does Modified Dietz go away as a legitimate way to calculate returns? No! You can use Modified Dietz for flows that are below your minimum.
11. Does this rule apply to real estate and private equity? No!

Hope this helps!

My favorite risk measure

As promised last month, I thought it would be helpful to review the various risk measures. And, I may as well discuss my favorite: Tracking Error.

Tracking error is an ideal measure to assess the active risk the manager is taking. Many risk measures (e.g., standard deviation, downside deviation) don't directly take the benchmark into consideration: tracking error does. As Grinold & Kahn put it, "the client bears the benchmark risk, and the manager bears the active risk of deviating from the benchmark." Tracking error measures the active risk: the risk the manager bears.

The math is simple: standard deviation(average portfolio return - average benchmark return):

The higher the tracking error, the more the manager has deviated from the benchmark; the lower, the closer the portfolio is to the benchmark. An active manager with a very low benchmark can be accused of employing a passive approach to investing, which can be criticized when higher fees are employed; too high a benchmark can be a signal that the manger has moved too far away from the benchmark and needs to be brought back.

Goldman Sach's "Green Zone" is an example of a risk management approach that uses tracking error to monitor their managers. Their article (see below for details) received the Dietz Award as a testament to its value. Tracking error ranges (the "green zone") are established for each client and as long as the portfolio stays within the range, everything is fine. But, if it drifts into the "yellow" or "red" zones, then an adjustment is required.

Granted, tracking error does not give an indication of the potential loss or inability to meet objectives (two commonly used definitions for risk), but it's an effective tool in monitoring the risk being taken by the manager. It should be included in your arsenal of risk measures.

Litterman, Robert B., Jacques Longerstaey, Jacob D. Rosengarten, Kurt Winkelmann, & Paul R. Laubscher. "The Green Zone...Assessing the Quality of Returns." The Journal of Performance Measurement. Spring 2001.

A moment to reflect on a needy nation and its people

We urge you to consider giving to the relief efforts in Haiti. This poor nation has been thrown into a horrible state as a result of a severe earthquake. Thousands and thousands of people have lost their lives, and those who are living are struggling to find food and water.

May we suggest Catholic Relief Services: www.crs.com.

Give a little, give a lot, but please give.

Carving out in 2010

I got a call this week from a firm that is trying to deal with the recent changes to the Global Investment Performance Standards (GIPS(R)) rules regarding carve-outs. As of January 1, firms that wish to use carve-outs must manage their cash separately. While this may appear to be a reasonable change, the impact is quite noticeable. This firm is just one of many, I suspect, that is now having to deal with the new reality of this change.

This firm proposed the following. Their portfolio system (Advent's Axys) can produce asset class returns (stocks, bonds, cash). They will track the cash that's being assigned to each asset class elsewhere (probably in a spreadsheet; thus, they will "manage the cash separately"). They propose to allocate the income they get from the custodian based on how the cash is assigned throughout the month. They will calculate the returns daily, by taking the proportion of each asset class that's invested, times its respective return, and sum the result. You've probably seen this formula before:

Here, the "w" represents the weight of each of the two components of the asset class (the amount invested in stocks, for example, and the amount invested in cash) divided by the total invested (cash plus stocks); "r" represents the returns of each asset class. This formula works, provided there are no cash flows. In this case, cash flows would be represented by transactions. Since we're talking daily returns, you can be sure there will be transactions occurring, thus invalidating this formula.

As for the income, the custodian doesn't pay income based on the amount that the account starts the day with but rather with what it ends the day with; thus, if cash is shifted from one asset class to another or new money arrives, the beginning value is a poor proxy for the allocation. But this is the least of our worries. The real problem, as I see it, is the inability to derive accurate returns; separate "cash buckets" are not being maintained in a manner that will make this work.

And, if you can't make the rules work, you'll have to abandon carve-outs: sorry. But, you can continue to show this information as supplemental to your GIPS compliant presentation. This may not be as attractive as what you were doing previously, but it at least is a way to continue to demonstrate your breadth of investing in the heretofore carved out components.

Side pockets & GIPS

The Global Investment Performance Standards (GIPS(R)) don't currently have any rules or guidance specifically geared to the world of hedge funds, which seems a pity. Some think that "everything you need to know is already there," but I don't. Take side pockets, for example.

Side pockets are often employed to move less liquid assets away from the main part of the fund. Investors are typically given an option as to whether or not they want to invest in the side pockets. How should these be handled from a GIPS perspective?

My recommendation: your composite should (a) have the return of the total fund (with the side pocket), (b) provide the return of the fund without the side pocket, and (c) optionally show the return of the side pocket, too.

Security level attribution: whether you need it or not

I suspect that software vendors are often frustrated by some of the requests they receive from clients. Clients occasionally ask for things that don't make sense, but the vendors have to respond (or attempt to convince the client that they're wrong, which might be a challenge ("a man convinced against his will, is of the same opinion still")). Take security level performance attribution, for example. Attribution software RFPs will typically ask the vendor whether or not they provide this. If they answer "no," they may be excluded from the search. But why does anyone need this? I have argued against security level attribution for some time. As with many aspects of performance and attribution, there's controversy surrounding this topic, so I realize that some will argue that security level attribution makes sense; I just don't see that it does.

There are three scenarios when it comes to securities:

1. The portfolio owns the security but the benchmark doesn't
2. The benchmark owns it but the portfolio doesn't
3. Both the portfolio and benchmark own it.

I've shown previously (in articles and our newsletter) that the "Brinson models" are somewhat flawed when it comes to dealing with cases when a security is in one (the benchmark or portfolio) but not the other. Granted, there are "workarounds" available to deal with this, but the models themselves don't come equipped to handle these scenarios. But if the portfolio is invested in a security that's not in the benchmark, is this an allocation or selection decision? Surely it's selection, yes? And if we're both in the same security and I own more, is this an allocation decision? HARDLY!

Let's consider the storied S&P500(R). It, as the name suggests, is comprised of 500 securities, allocated across 10 GICS(R) (Global Industry Classification Standard) sectors. The largest sector today is Information Technology, which comprises roughly 19% of the index and has 76 securities. Let's say that I am managing against the S&P500 and for technology decide to underweight. And, for this sector I select just three securities: Apple, Microsoft, and IBM (all members of the S&P500). At the sector level, my portfolio will be evaluated on allocation (I underweighted) and selection (my composition differs from the index's). At the security level, I would no doubt have more in my three securities than they have in the index, given that these three must share the allocation with 73 other securities. Is my overweighting going to be evaluated? For what purpose? I underweighted the sector; I'm not overweighting the securities! It's all about selection!

At the security level, contribution or absolute attribution should be employed: not relative attribution!

Beta, wanted dead or alive

A 1992 Journal of Finance article by Fama & French is often cited as the source for the line, "Beta is dead."

Recall that Beta is a measure of volatility; actually, a security's volatility vis-a-vis the market. It is used in the Capital Asset Pricing Model, for which William Sharpe received the 1990 Nobel Prize in Economics.

The formula is the covariance of security return with the market, divided by the market's variance. The market's beta equals 1.0; a higher beta means the security goes up faster than the market, and will also go down faster; a lower beta means the security moves won't be as great as the market's.Critics (and sufficient analysis) contends that beta fails as a predictor of security returns; that there are other attributes that play a bigger role. Most of the criticism has been somewhat respectful, though some, like Nassim Taleb (The Black Swan) have been a bit more forceful. Even Jack Treynor criticized its use in the aponymously named risk-adjusted measure which he disavows responsibility for.

Fama & French, as you may recall, introduced a three factor model, which includes beta, size (large cap vs. small cap) and style (growth, value). Other models have been suggested, as well.

In spite of the critics, beta remains a much calculated and reported risk measure. And why is this? Perhaps because "everyone does it." Or, "we've been doing it so long, why stop?" Or, "because it's easy to understand and interpret" (even though it's wrong?). Beta may be dead, but it's still around and kickin'.

A pause for some writing commentary

Recall the scene from The Jerk,when Navin R. Johnson (Steve Martin) discovers he has rhythm, and so decides to strike out on his own. Well, in Friday's blog Susan Weiner discusses rhythm and writing. I love writing and therefore love to read about writing, and would argue that I could probably stand some rhythm.

In my opinion, there are two types of writers:

• good story tellers, who focus on the story, not the writing
• good writers, who focus on the writing.

Examples of the latter are Herman Melville ("Moby Dick"), Toni Morrison ("Beloved") and Fyodor Dostoevsky ("The Idiot"). I happen to be listening to "The Idiot" right now (a long book that translates into more than 20 hours of recording), and am enjoying immensely. To write a blog, memos, or even newsletters hardly requires the skill of a Melville, Morrison, or Dostoevsky ... if it did, it might take weeks just to get a single post posted. But good writing still matters. I have seen so much BAD writing that when I see good, or even better, excellent writing, I'm impressed.

Good writers are good readers. One must read often, preferably of good writers, to pick up ideas and perhaps some rhythm. I don't recall who it was, but someone said that good writers write one word at a time: I believe this is why it takes Morrison years to put a book together: her writing is exceptional. Individuals who can crank out a book a week may be good storytellers, but they hardly (in my opinion) come close to the level of these great authors.

p.s., I'm listening to The Idiot because (a) I've owned the book for more than 20 years and haven't made an progress, (b) subscribe to Audible.com, which provides me a book a month, and (c) I'd much rather listen to a book being skillfully narrated than the drivel one often hears on the radio.

Calculating returns with little data (revisited)

Last Friday I posed a question about how one would derive returns when they had limited data: month-end holdings and period transactions. A couple folks basically explained that this CAN be done. Here's what you do:

• Take your holdings file and preceding transactions and
• back into the holdings for any prior period.

By transactions, we're assuming you have buys, sells, income, and corporate actions. With this information, you can get anywhere.

Really simple example: your holdings file for 12/31/09 shows you have 100 shares of IBM and 200 shares of Ford, plus $500 in cash. You'd like to know what you looked like on 11/30/09. Your 11/30/09 - 12/31/09 transactions list:

• 12/15/09: sale of 1,000 shares of Citicorp for $5,000
• 12/17/09: purchase 200 shares of Ford for $3,000
  
• 12/23/09: withdrawal of $1,500

What we do is start with our current position and reverse all the entries:

• 12/23/09: withdrawal of $1,500 becomes a contribution of $1,500 (our $500 becomes $2,000)
  
• 12/17/09: purchase of 200 shares of Ford for $3,000 becomes a sale of 200 shares (our 200 shares go to zero and we add $3000 to cash)
  
• 12/15/09: sale of 1,000 Citi becomes a purchase of 1,000 shares (we pick up 1,000 shares and reduce our cash by $5,000)

Meaning, that on 11/30/09 we held:

• 1,000 shares of Citi
• 100 shares of IBM
• zero cash.

This may help:

As you can see, I took our starting position and simply reversed all the entries. Granted, this was a very simple example, but you at least see how it works. You would need to get pricing for 11/30/09.

By the way, if you plan to do this manually, depending on how many periods you need to create and how many positions and transactions, you could be doing it a while.

What's the lesson here? Well, first, it means you do not have to store every day's position! You can store monthly positions and always back into any specific day. In the world of IT (information technology), there's always the issue about processing time versus space. Granted, disc storage has gotten a lot cheaper, but if you don't need to store dailies, why bother? Second, if you have to reconstruct records and have minimal information, you may still be able to accomplish it.

Calculating returns with little data

I'm spending most of this week on an assignment for a client who is engaged in a lawsuit; well, actually I'm doing the work for the client's attorney. I'm charged with calculating returns for the stocks in the portfolio, and was given only year-end statements that include the year-end positions, along with transactions, income, and disbursements for the year. The first year only has that year's ending position. The exercise spans six years. How does one do this?

I am calculating both time- and money-weighted returns. I'll therefore need monthly returns for the time-weighting. So, how would you do it?

Again, all you have are:

• year-end positions
• transactions for the year
• income for the year
• disbursements for the year.

I'll let you ponder this awhile before stating how I did it.

BTW, I think this would be a good exercise for the CIPM program!

Presentations versus presentations

I had a call yesterday with a client who we're helping to become compliant with the Global Investment Performance Standards. There was confusion at his shop regarding the presentations they will make to their prospects: must the information they show in their PowerPoint be "compliant" with GIPS(r)?

While GIPS speaks about "presentations," we mean the presentation that provides the firm's records in accordance with GIPS. Compliant firms are required to make every reasonable effort to ensure that all prospects receive a fully compliant presentation (a noun). BUT, this doesn't have to do with the presentation (a verb) that firms often conduct with clients. Firms have a great deal of leeway in what they show, though we expect that they provide adequate supporting information and disclosures so that prospects fully understand what they show; can't mislead your prospect. But, their "GIPS presentation" (again, a noun) doesn't need to be part of their presentation (verb). Make sense? Okay, perhaps I'm mistaken by saying that the latter is a verb; my point is that it involves action (making a presentation) as opposed to a physical document (handing someone a presentation; in this case, a document).

Yet just another commonly used word that causes some confusion.

Fraud & GIPS

A couple recent and related blog posts have addressed recent suggestions about the Oppenheimer College Fund Fraud investigation. The Money Game actually points to Mish's site,  which is one that I have listed as a blog I periodically visit.

As Mish pointed out, this fund is alleged to be a hedge fund masquerading as a mutual fund. It appears that the firm also claims compliance with the Global Investment Performance Standards (GIPS(R)). While it isn't clear, yet, whether or not they were also verified, we nevertheless must be concerned that yet another "GIPS compliant" firm may have committed fraud. The details have not been provided such that we can determine to the extent that this infraction may have run afoul of any specific GIPS rules (of course, the requirement to abide by laws would clearly be in conflict with GIPS).

What makes this case all the more interesting (and challenging) is that there are actually two firms that carry the name "Oppenheimer," and both are located in New York City. They were apparently related at one time but no longer are. In addition, there are two funds with the same name! Talk about confusing.

I had the opportunity to speak with Mish last week about this topic. He explained (and noted as an addendum to his blog piece) that he pulled some earlier verbiage once he discovered the existence of the second firm.

One might think that these most recent problems might cause further discussion to ensue regarding a verifier's role in detecting fraud. As has been stated previously, verification isn't designed to detect fraud. In addition, we wouldn't want this additional requirement to be placed on a verifier. BUT, we would hope that verifiers would be sensitive to things that just don't look right.

This is one reason we don't conduct remote verifications: we don't believe a verifier can do an appropriate and adequate job by verifying a client from the comfort of the verifier's offices. Sorry. I've suggested before that I believe that the GIPS Verification Subcommittee should at least encourage verifiers to spent a large portion of their time doing the verification in the client's offices. Whether or not this will come to pass is, of course, open to speculation.