A client reporting "no no"

It appears at times that reports are designed to convey how smart the sender is. And while this is perhaps not normally the intent, it can nevertheless be the message. Sending a client, for example, the results of a complicated fixed income attribution model, when we haven't conveyed in a clearly understandable manner the meaning of what's shown, serves no purpose.

Even sending what many might consider basic return or risk statistics, when they aren't necessarily appropriate, would fall into this category. Why, for example, would we send a brokerage client tracking error? Tracking error, if you recall, is the standard deviation of the excess return, which in turn is the portfolio return minus the benchmark. It basically tells us how closely our portfolio has tracked the index. But why would a retail client care about this? Are they managing their portfolio vis-a-vis an index? Okay, if they are then fine, send them tracking error. But if they're a fairly normal (whatever that means) brokerage account, why give them this statistic? It may confuse them but will most likely not enlighten them.

Let's not get carried away with our reporting. Just because we can send a client something doesn't mean we should.

"Audited performance figures are what I want" ... but can I get them?" cont'd

Earlier this month I posted about the issue of firms wanting their returns "audited" when they have a GIPS(R) (Global Investment Performance Standards) verification conducted. At that time I mentioned that I had asked a couple of CPA colleagues their thoughts on this. I mentioned at that time how the first responded; here's what the second wrote:

[Accounting firms] shouldn't let anyone say that they were "audited." No accounting firm would let someone present their performance as audited.  We do an examination.  When my clients ask me about this, I respond that they can say that their results were "EXAMINED."      
 
If you look at the opinion that the accounting firm renders, its heading is "Report of Independent Accountants."  It does not state "Report of Independent Auditors."
 
We can only call ourselves Independent Auditors when we conduct an audit.  An audit can only be conducted on a full set of financial statements (with a balance sheet, statement of Operations and Cash flows).  We can not (under our professional standards) audit part of financial statements or a performance presentation.

While it's common to hear our verification clients state that their "auditors are here" or that their numbers have been "audited," it's clear that this is technically incorrect. And, it's clear that it's incorrect for an accounting firm to try to distinguish themselves from non-accounting firms who perform verifications by suggesting that with them the client gets "audited returns."

Interesting, I think. Hope you agree.

Gaining clarity

I don't know about you, but I was a bit confused by the GIPS(R) (Global Investment Performance Standards) requirement that compliant firms must disclose that additional information regarding policies to calculate and report returns is available upon request (see ¶ 4.A.17 of the 2005 edition). What does "report" mean? Reporting to clients? Prospects?

Well, the 2010 edition makes this much clearer. Compliant firms will be required to disclose that their policies to value portfolios, calculate performance, and prepare compliant presentations are available upon request (see ¶ 4.A.12 of the 2010 edition). This means that  you need to have such policies, and so if you don't, it's time to begin to work on them!

"Logic does not require empirical verification"

The above quote comes from Nassim Taleb's Fooled by Randomness, which I started to read over the weekend while vacationing at the Jersey Shore (light reading). I'm finding that the book, as with his later Black Swans, has many interesting insights.

But this quote, to me, says a lot.

When, for example, I discuss the topic of money- vs. time-weighting, I often resort to logic (or at least to me it's logical). If we use time-weighting to eliminate the impact of cash flows because the client controls the flows, then wouldn't it seem logical that we would include the impact of cash flows when the client doesn't control the flows (i.e., when the manager does)? To some it apparently doesn't seem logical; in fact, some argue that you cannot use this form of logic. That yes, it is true that we use time-weighting to eliminate the impact of flows when the client controls them, but when the manager does we should still use time-weighting.

Sorry, this doesn't seem logical to me. If anything this counter argument screams the absence of any logic.

Fortunately, there's plenty of empirical evidence to demonstrate why money-weighting is the way to go when the manager controls the flows, but to some no amount of evidence will sway their view. Oh, well. You win some, you lose some. The reality is there are different views and everyone is entitled to theirs.

Performance and risk from a parallaxical perspective

I want to thank William McKibbin for introducing me to a new word: parallax. He used it in a response to one of my recent posts and I must admit that I was forced to look up its meaning, because it was new to me. Dr. McKibbin has a blog which I frequently visit, and so am pleased that he not only reads my blog but also occasionally offers commentary.

As per dictionary.com, parallax means "the apparent displacement of an observed object due to a change in the position of the observer." This word does fit quite well, does it not, when we speak about performance and risk? 


I have written about performance from a matter of perspective. That is, depending on one's perspective, you may see performance differently or more importantly, have different requirements when measuring performance. The same applies to risk. Parallax is yet another way to view these phenomena, where depending on where one is standing, they are seeing things differently. 




p.s., as for "parallaxical," I made that word up...but it works, does it not?

Bernie & GIPS

I received an interesting question from a Linkedin mate today regarding the Global Investment Performance Standards (GIPS(R)) and the impact that our friend Bernie Madoff may have had:

I was just curious about this and I figured you would be a good person to ask,

With all the scams (Madoff) and market meltdowns, has the amount of firms looking to become GIPS verified increased? Have they been feeling the pressure to get GIPS verified? I would think they would but it still seems there are a lot of firms out there that are not.

Any insight would be greatly appreciated.

We have definitely seen increased interest in compliance. Our verification business grew by more than 400% last year and this was partly due to firms becoming compliant for the first time. One might also attribute some of the growth to the market downturn, where firms are making the investment to comply in order to attract new business. And, we've seen increased interest in compliance (and verification) from the hedge fund community.

Yes, Bernie has been very good for GIPS!

Getting the dates straight

I've commented in the past how the new version of the Global Investment Performance Standards (GIPS(R)) can be a bit confusing. The "2010" in the title refers to the published date; the effective date is 2011 (actually, January 1, 2011). But when do firms have to begin to comply?

Well, the answer is "it depends." First, firms can comply early if they so choose. But when MUST GIPS-compliant firms comply with the new provisions. The simple answer: when they begin to reflect 2011 returns in their presentations.

So, for example, if you typically show quarterly returns in your presentations, then you'd comply when you show your 1Q2011 returns (probably around April of next year). But what if you only show annual returns? Then, you would comply when you show your 2011 annual returns...which might not happen until January 2012!