It seems that when we come across negative values, or when trying to express differences between lower and higher values, from the perspective of the lower, we often have a difficult time adjusting. Handling positives is pretty simple; perhaps because we began our schooling shielded from negatives, and in most things, being on the positive side of zero is a good thing. Likewise, speaking of a higher value relative to a lower is something we're all quite adept at.
I've commented about the Share ratio's challenges when returns are negative, how they can sometimes provide what appears to be nonsensical numbers. I've also addressed the problems when one wants to geometrically link returns for short positions.
It's not uncommon to find folks struggle in trying to compare two negative numbers, for example, -10% and -20%. We may hear that the second is bigger than the second; bigger in what way?
In this past weekend's Financial Times, in an article titled "Cyprus laments end of way of life as 'family' lends no comfort" (by Joshua Chaffin) the following: "The typical German household is three times less wealthy than its Spanish or Italian counterpart, according to a Bundesbank study of personal wealth published this week. Whereas the median Spanish household has net worth of €178,000, the equivalent in Germany is €51,000."
"Three times less wealthy"??? Would it not be more appropriate to state that they have one-third the wealth?
I realize that mathematics / arithmetic is a challenge for many. But we should all be capable of comparing two numbers in a way that makes sense.
One of our GIPS(R) verification clients asked me recently about attribution and mutual funds/ETFs; whether there were special requirements for them.
Some thoughts:
Remember that with attribution, we align "sets" of securities in the portfolio with their equivalent "set" in the benchmark. An aside: to my knowledge, I may be the first person to use the term "set." I think it works, though. For example, we can have a:
- Set of all items: this would be the portfolio
- Set of one item: this would be security level attribution, which I oppose, save for absolute attribution (aka "contribution")
- Set of no items; i.e., the "null set": would apply where the portfolio is void a set (e.g., a sector) that the benchmark has securities in.
We group securities into sets (where sets can be asset classes, sectors, subsectors, industries, etc.), and then match what's the the portfolio (that is, the weights and returns of each of the sets) with the corresponding set in the benchmark.
Thus, if we have mutual funds that fit into the small cap equity set, for example, then if we can group the securities in the benchmark by market cap, they would align. Nothing really mysterious here.
A second important point: unless the manager is MANAGING the mutual fund, we do not drill down to the security level, when it comes to evaluating the manager's performance, since he/she did not pick the underlying securities.
Thoughts?
Performance presentation standards have existed for more than 20 years now. First introduced by the Financial Analysts Federation in the mid 1980s, later taken up by the Association for Investment Management & Research, and now championed by the CFA Institute, the notion of a "standard" for firms to "present" their performance to "prospective clients" has been widely accepted. And, over this time, the idea of a plan sponsor complying has been questioned, criticized, and, most recently, memorialized.
The questioning has been general, the criticism in the form of at least one article (in Pensions & Investments, which I rebutted), and memorialized in the recent unveiling of draft guidance.
While the Standards have been for firms that manage $£¥€, etc. for others, we've seen increased interest in plan sponsors wishing to comply. Why would such entities choose to comply? Because the Standards are "best practice," and virtually everyone should, when possible, strive to adopt best practices, yes?
When I was a member of the USIPC, we drafted guidance, which apparently has now been broadened and incorporated into this document. And, we recommended using the term "plan sponsor" to embody any asset owner (e.g., pension funds, endowments, foundations, family offices, government agencies), rather than the more traditionally limiting term. Glad to see that it is still being used this way.
The guidance doesn't introduce anything new, at least as far as rules, but does show how many of the terms apply to plan sponsors, and clarifies what parts of the Standards a plan sponsor needs to be conscious of.
Perhaps most importantly, it recommends the use of money-weighted returns (in addition to time-weighted), to reflect the impact of cash flows, and thus, report the returns of the asset owners. Nice!
Please take the moment to review the document and offer your comments (mine were sent in last week!). We have seen interest in compliance, and count a few such entities as verification clients.
This May The Spaulding Group will hold its 11th annual Performance Measurement, Attribution & Risk Conference. And, for the first time it has a theme:
The Superheroes of
Performance Measurement
To make the event extra special, we're doing some rather unique things, one being our phenomenal brochure! Here's just a sample of what it contains; first, the cover:
Here's page 2:
And one more page:
The brochure was mailed this week. If you haven't gotten a copy, please let us know, and we'll send one out. I think it is quite impressive. You can see a PDF version here, if you'd like.
The brochure was designed by Patrick Fowler and Chris Spaulding (along with our graphic artist, Cybil, of course!) Please review it to see our fabulous lineup of speakers and topics. A similar brochure will soon be mailed for PMAR Europe IV, which will be held in London in June.
For more information about the conference, please contact either Patrick or Chris.
We, at The Spaulding Group, are very excited about our first "AdToon." Chris Spaulding, our Executive Vice President of Strategy and Business Development, was responsible for this design project. It provides some great background information about GIPS(R) (Global Investment Performance Standards) and verification.
The subject of the appropriateness or ability of plan sponsors to comply with GIPS(R) (Global Investment Performance Standards) has been around since the Standards' inception; actually earlier, if we include the AIMR-PPS(R).
I recall an article in Pensions & Investments several years ago, where the author condemned the idea of compliance for pension funds. It was obvious that this fellow felt quite strongly that the Standards did not apply to those who own the money. I responded with a letter, acknowledging the accuracy of his statement, but questioning why anyone would be upset with an institution, such as a teachers' retirement fund, choosing to comply with the Standards.
A few years ago, this topic arose in the USIPC, and I was initially involved in developing draft guidance. Well, that draft has expanded and now open for public comment!
Why would a plan sponsor, endowment, etc. wish to comply? Perhaps because they see the Standards as "best practice," and believe that compliance enhances their operation, procedures, and reporting.
Among our verification clients are institutions that fall into this category. They wish to always adhere to "best practice," and see the Standards as just one more to comply with. This guidance should provide additional help to them, as well as others who are considering compliance.
If you fall into the category of an "asset owner," you'll want to download a copy, review it, and offer your comments. You have until June 3, 2013 to comment. Please do!
This is not intended as an excuse, BUT, this is a very busy time of the year for us, as this is when we do most of our verifications. And so, our February newsletter got delayed. And then, it became a bit of a "rush," and I failed to remember to provide a new puzzle (along with the answer to January's puzzle). I'm sorry.
I'll do better this month!
I was chatting with one of our software certification clients recently, and we got to discussing what qualifies a system as being a "GIPS(R) (Global Investment Performance System)" system?
As I often do, I searched for a metaphor (some would say, analogy), and fell upon a "golf cart."
Could you make the argument that a golf cart is an automobile? Consider that they typically:
- have a motor
- have a steering wheel
- require a key to start
- have a gas pedal and a brake pedal
- have an emergency brake
- have a windshield
- have a seat
- have a horn
many features of a typical car. But is this sufficient for it to be an automobile? If no, what other criteria would we expect it to fulfill? Consider requiring:
- a heater (in the 1950s and 1960s (and earlier, too) heaters were optional; it wasn't uncommon to see "r/h" in used car advertisements, to indicate that the car had a radio and heater! I don't know if the "Model T" had a heater or not, but it clearly qualifies as an automobile.
- an air conditioner (not standard until fairly recently). Clearly a 1953 MG is an automobile, and yet doesn't have a/c!
- headlights
- brake lights
- ...what else?
Okay, so perhaps we could define criteria that something would need to satisfy before we allowed it to be called an "automobile."
In developing our software certification service, John Simpson and I spent quite a lot of time defining the necessary features and functionality we'd expect a system to have. And, the list is somewhat demanding; but, our certification is rigorous; otherwise, what's the point? What we have are those items which we believe most folks would expect a performance system to have. We focus on several different areas (e.g., rates of return, GIPS, equity attribution), with each having its own list.
Consider a GIPS system. What would we expect it to have? Clearly, the ability to support composite construction, right? I recall being told about 15 years ago that someone had "the best AIMR-PPS(R) (predecessor to GIPS) system. I asked "how do you handle composites?" The person responded, "what's a composite?" Duh!
So far, two firms have passed our certification, with others pursuing the process. Our clients have found it beneficial to have an objective, knowledgeable, and critical authority review their offerings. But, as you can imagine, trying to "nail down" what the minimum criteria should be can be a challenge.
If you care to share with us what you think are the minimum criteria for a GIPS system, we're all ears!
.png)
