With 10,000 in circulation, it's time for a 3rd edition!

The second edition of The Spaulding Group's very popular Formula Reference Guide is completely sold out.

What to do, what to do?

Well, we decided! We will publish a third edition, that will be revised and expanded. Plus, special attention will be given to formulas that are on the CFA Institute's CIPM examination.

Many, many folks have told us how valuable they find the guide to be. We frequently find it on our clients' desks or credenzas, for easy reference.

We have committed to have this new edition ready by year-end. We'll let you know more as we move forward.

Care to suggest a formula or two you think we should add? Let us know, but the deadline to do so is July 31!

p.s., We will soon announce a "pre-publication" offer that will make copies available at a significant discount, so stay tuned!

The use of words: taking a cue from President Clinton

You may recall President Clinton's statement that "it depends on what you mean by the word, 'is.'" I think Clinton made a good point, and I often find myself citing this line, as I think it has extensive relevance, given many words' or phrases' varied meanings. Knowing what is meant is key to understanding.

I recently opined on the Q&A-based allowance for GIPS(R) (Global Investment Performance Standards) compliant firms to remove certain disclosures from their presentations, if they are no longer meaningful or relevant. Coincidentally, we've recently seen in the press (e.g., in today's WSJ, in an article by Valentino-DeVries and Gorman, titled "Secret Court Ruling Expanded Spy Powers") the U.S. National Security Agency's expansion of getting phone records of its citizens, by redefining what the word "relevant" means.

While we might expect GIPS compliant firms to narrow its meaning, so as to avoid continuing the disclosure of certain information in their composite presentations (e.g., composite name changes), in the case of the NSA it appears that the term's meaning has been broadened. I won't comment any further on this subject, at least relative to the NSA.

We often have a difficult time defining what words or expressions mean. "Relevant" and "meaningful" will only join this list, which, for GIPS-compliant firms, includes "material." This doesn't mean firms can't use these words; just that they need to be circumspect, and document within their policies, as best as possible, what the words mean and how they're applied.

p.s., and a special thank you to Diana Merenda for providing the "word art" graphic which appears at the top of today's post.

Enroll in Automobile University

The late motivational speaker and author, Zig Ziglar, coined the phrase "automobile university," to refer to the use of the time spent behind the wheel to expand one's education. He suggested that many drivers can increase their knowledge about a variety of subjects quite a lot during their drive time.

For close to 30 years I have been an active student in this university, initially taking advantage of the various cassettes (now CDs) from Nightingale-Conant. They offer a very wide variety of speakers and topics. In fact, it was from listening to one of these sets that I got the idea to go off on my own and start a company (The Spaulding Group), which has now been in business for 23 years.

In 2009, a friend and client turned me onto Audible.com, which offers access to a tremendous number of books, covering all types of subjects and genres. A year or two before, I had begun to buy books on CD, as a way to expand my reading while listening (I still read a great deal the old fashioned way, but figured that by listening, too, I'd expand my reading experience even more).  Audible.com provides a more efficient, expansive, and less expensive way to do this.

I drive more than 20,000 miles a year, so the time available to listen to these books (which I download to my iPod) are extensive. While I could be listening to the radio or perhaps music, I generally prefer to spend the time listening to books. I feel that it's a much better use of my time. It allows me access to more information and education, as well as to books that I had never gotten around to reading before.

My taste in reading is quite varied, and this resource is quite helpful in allowing me to invest my time wisely. For example, I've listened to classics in literature (e.g., Dostoevsky's The Idiot and The Brothers Karamazov, F. Scott Fitzgerald's The Great Gatsby, Thoreau's Walden, Cervantes' Don Quixote, and Hugo's Les Miserable; business books such as Wessel's In Fed We Trust, Greenspan's The Age of Turbulence, Paulson's On the Brink, and Zuckerman's The Greatest Trade Ever Made; contemporary fiction, such as works by Baldacci (who I've come to like) and Howe's The Physick Book of Deliverance Dane; political books, such as Ayn Rand's Atlas Shrugged and Gibbs' The Presidents' Club; as well as autobiographies, such as Massie's Peter the Great and Catherine the Great. In all, around100 books. Some are fairly short (eight hours or less) while others can be quite long (e.g., Atlas Shrugged was 63 hours and Les Miserables was more than 60 hours). For the most part, the books are unabridged, so you're getting the full book.

In addition to listening while I drive, I also listen while I exercise, which I try to do several times a week (on an elliptical, for 45 minutes).

I strongly recommend that you consider enrolling in Automobile University. There are probably other resources than Audible.com, though I find it (Audible.com) to be reasonably priced (you pay a monthly fee, which allows you access to recorded books that would normally cost much more than the fee itself). You can also make additional purchases, which I've done a few times. Note that they offer discounted pricing for the first three months, which provides a great way to try it out. I suggest you do!

Happy July 4th

The markets in the United States are closed today, in observance of July 4th.

July 4th has a special personal meaning for me, for that's the day in 1970 that I met the young lady who would (two years later) become my wife; we have been married for over 40 years and today celebrate the 43rd anniversary of meeting each other.

For our nation, it's recognizing the day that we declared our independence from Great Britain. Those individuals who signed the Declaration were, as some put it, signing their death sentence, for if we had lost the war, they surely would have lost their lives for treason. The bold steps they took have resulted in a great nation.

Happy July 4th!

CIPM Program: a way to benefit your colleagues, the industry, and yourself! (pretty cool)

The Spaulding Group remains big fans of the CIPM(R) program, and so, we are posting details that were recently sent out via an email from the CFA Institute.

Building a better investment industry starts with you. By referring a colleague  to the newly enhanced CIPM Program, you’ll be helping to raise standards in the industry. If you know someone whose role relates to investment performance and risk evaluation, this is a great time to introduce or reintroduce them to the CIPM Program. Registration for the October 2013 exam is open through July 31. The CIPM Program will help your colleagues: Deliver more actionable investment insights Improve manager search and selection Provide feedback to maximize your firm's efficiency Increase risk awareness Produce comprehensive and transparent reports As a thank you, we’re rewarding those who refer a colleague with a chance to win an Amazon Kindle Fire HD. Participation in the contest is easy. Simply refer the CIPM Program to your colleagues and direct them to register for the chance to win. When your colleagues register for the contest and indicate that you referred them, both you and your colleagues will be entered into a random drawing for a chance to win an Amazon Kindle Fire HD. The complete Official Rules for the contest can be accessed here. For further information about the enhanced CIPM Program, visit http://www.cfainstitute.org/programs/cipm/Pages/index.aspx

Cash can be such a drag ...

A Spaulding Group verification client contacted me with a non-GIPS(R) (Global Investment Performance Standards) related question, which I want to share with you, as I think it has wide applicability.

They have a commingled vehicle that restricts cash flows to always occur on the first of the month. For contributions, this works quite well. However, they've discovered an issue with withdrawals.

One of their clients requested a sizable withdrawal last month. The money flowed out on July 1, which is fine and dandy. BUT, the money had to be raised during the month of June, meaning that for much of the month, their cash position was much higher than it should have been (it is typically close to zero, but was more than 10% as a result of the sale of assets to raise the requested cash). Consequently, the fund's return was much lower than it should have been, because of the cash drag.

A possible solution: once the cash was raised, it is no longer under the manager's discretion (i.e., they cannot invest it). And so, perhaps they should either (a) move the cash to a "temporary account" or (b) flag it as "un-managed."

Here's an example; hopefully it will help. It's in three parts.

Part #1: the portfolio as it would have looked at the beginning and end of the month, had there been no cash flow:

  

As you can see, we began with 100 million and ended with 105 million: a return of 5.00 percent.

 

Part #2: One client requested that 10 million be raised, and so, securities were sold mid-way through the month, in a proportionate manner, to raise the necessary cash, which remained in the portfolio until the end of the month [NOTE: if you have a hard time reading this graphic, just click on it to expand it]:

 

 

We see that the 10 million was raised halfway through the month and that it did not appreciate any further (we're assuming a 0% return for simplicity). Because the cash remained, its presence dragged down the return of the portfolio

 

Part #3: Finally, we see the case where we transfer the cash that was raised out (either to a temporary portfolio or to an un-managed status):

 

As you can see, by shifting the cash out, we are able to eliminate the impact it would have on the fund's return.

 

There are clearly some assumptions made here. One being that the manager has the ability to segregate the cash (which most accounting systems should be able to support), and provides returns to the fund's shareholders. Second, that the custodian's report won't cause any issues; it shouldn't, as the manager can explain the math behind his/her returns. And third, that the assets are liquid enough that mid-month valuations can be done, to support the bifurcating of the monthly return (prior to and after the transfer of cash).

 

If a firm does this, then it should document it and ensure that this approach is used consistently. It would seem to be applicable to hedge funds that might have to raise cash that they normally wouldn't have, and don't wish the cash to cause a drag on performance.

 

Note that the monthly return that is derived from the unit values (produced by the custodian) won't match what the manger provides; however, once we get past this month and calculate returns, the cash's impact should disappear. The only time it should have a lasting impression will be if this is done in December, in which case the manager's return will be the correct one; at least in my view. What's yours?

 

p.s., You may noticed that more than $10 million left; I show the full cash going out. We could have had just the $10 million go, leaving a small residual amount, but this would have been in the earlier case, too; the results won't really differ. I think the point is clear.





Relevant and meaningful sunset rules

As noted last week, firms that comply with the Global Investment Performance Standards (GIPS(R)) are now given the opportunity to no longer disclose composite name changes when they are deemed to be no longer "relevant and meaningful."

I think it's fair to interpret from this that such a test can be applied to other "required" disclosures, too. Although there is no conditioning language embedded within the Standards, given that such leeway has been permitted here, it seems to be a logical step to extend the same test to other disclosures; wouldn't you agree? And so, if a firm feels that the departure of the CIO (Chief Investment Officer) 13 months ago is no longer relevant and meaningful, they can stop disclosing it, as well as changes to the composite's strategy, and other things.

Despite the fact that these changes were introduced through a Q&A, I welcome them. It appears that the GIPS EC has decided that the sunset rules are flexible and in the hands of the firm. I think clear wording to this effect should be provided, to ensure that this interpretation is correct. Rather than stipulate that certain disclosures have to stay for one, two, five, ten years, by attaching the "relevant and meaningful" conditioning language, it appears that firms can choose when to discontinue their appearance. I believe that in addition, anytime a disclosure is removed, that its removal be documented, so that the verifier (and probably anyone else) can have a look.

Perhaps a Guidance Statement on Sunset Provisions would be a good idea ... I'd welcome that, too.