What about us?

Earlier this year, the Global Investment Performance Standards (GIPS(R)) Executive Committee published a draft guidance statement which expands the reach of GIPS into the asset owner world. I have commented briefly on it here before, and wrote an article for Pensions & Investments. In addition, I provided a comment letter, which is (along with the other feedback received) available on the GIPS website.

I was recently interviewed by P&I about one letter in particular: the one from Towers Watson Investment Services (TWIS). They raised the question about the Standards applicability for consulting firms, especially in cases where they "can be viewed as having discretion over assets under management and provide performance for [their] clients." Excellent issue to raise.

While written guidance would probably be helpful, I believe that one can cull from the Standards what is needed for such entities to comply.

Cases where the firm has discretion: There are times when a pension fund (or similar asset owner) has turned over responsibility for the management of the plan to a consulting firm. In these cases, the consulting firm has (a) the right and authority to determine the asset allocation (strategic and tactical) and (b) determine who will manage the various strategies (possibly with internal resources or through a subadvisor). Each underlying strategy (e.g., U.S. Large Cap Value) would result in a composite, that contains the appropriate subportfolio results for each of their clients. In addition, it would be appropriate to have a macro composite that consists of the entire portfolio, that will reflect the allocations as well as the management of the individual sectors. Because of the likelihood of materially different allocations, multiple composites would likely be created. The assets of the clients for which the firm has discretion would form the firm's AUM (Assets Under Management). These arrangements are similar to fund-of-fund managers.

Cases where the firm doesn't have discretion: Here, the firm provides advice to their clients, regarding allocations and managers. However, the consultant doesn't have the authority to make the ultimate decisions. In these cases, the firm could still create composites and provide returns, though these would be "supplemental" information, that would require clear and full disclosures regarding what is included. These assets would be AUA (Assets Under Advisement). Sufficient disclosures are necessary to make it clear that advice is given but not necessarily followed.

The Standards can, in many cases, be applied, without any additional guidance, but the same could have been said for asset owners. Therefore, some supporting guidance would no doubt be beneficial.