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Home» GIPS » A “down under” lesson about GIPS®

A “down under” lesson about GIPS®

Posted by David Spaulding - October 24, 2017 - GIPS, GIPS 20/20, GIPS standards, GIPS verification, Global Investment Performance Standards, Investment Performance Guy, superannuation fund

I’m in Sydney, Australia this week, where I spoke at the annual iPARM conference, and tomorrow will host, for the first time, a workshop titled Performance Measurement Trivia & Oddities. We will shortly put this on as a full day webinar (November 28), but that’s another story …

This post is about Australia (and arguably New Zealand, too). But please, don’t let that stop you from continuing to read this post, as I think (a) you’ll learn something, and (b) I hope you find this story of interest.

Today, I sat on a panel titled “How to Get Ready to Become Compliant. Should Australian Organisations Implement GIPS?”

Australia’s relationship with presentation standards

A little background for you: Australia was one of the first country sponsors of the Global Investment Performance Standards. They had their own standard (AIPS: Australian Investment Performance Standards), but actively participated in the development of GIPS. One of the members of the Investment Performance Council (IPC), the predecessor group to the GIPS Executive Committee, was from Australia. And, in fact, the head of the GIPS APAC region, for several years, was from the region!

But, something happened: the attraction went away. For some unknown reason, compliance just hasn’t caught on.

Okay, so perhaps we have some ideas, since the P-Group conducted a survey and found that among the reasons for non compliance are:

  1. GIPS is a “global passport,” and since most Australian managers don’t compete beyond the local market, there’s no need to comply
  2. Compliance is costly
  3. Creating composites is difficult
  4. The asset owners aren’t asking for it.

Believe it or not, these are mostly misconceptions about GIPS

Let’s consider these one at a time.

GIPS is a “global passport.”

Yes, it does represent itself that way. As I explained to the attendees, the CFA Institute (under its prior name, AIMR (Association for Investment Management & Research)), created a global committee around 1995 because shortly after they introduced the AIMR-PPS® (AIMR Performance Presentation Standards), other countries, including Australia, began to develop their own standard. And so, to avoid the problems we have with virtually everything else, they wisely foresaw the benefits of establishing a global standard.

Let’s briefly consider an example of something that lacks a global standard: electricity. The first country to adopt electricity was the USA. When other countries learned of what we were doing, they decided to do the same. However, they frequently (more often than not) did it differently. Consequently, those of us who travel frequently typically have to carry around electric converters so we can plug our computers, etc., into the sockets on our hotel room walls.

Imagine what would have happened had this committee not been formed. Managers who market to prospects in other countries would likely have to convert their presentations to conform to each country’s individual requirements. But, with a single global standard, that isn’t necessary.

That said, there is no requirement or expectation that compliant firms market globally. In fact, I’d argue that most of the firms that comply don’t!

Compliance is costly

No! Compliance is an investment. There is no “cost” associated with complying. By complying, your money is an investment, just as putting it into performance software that helps you calculate and report your returns properly.

Okay, so perhaps this is merely a matter of semantics. Clearly, if you choose to comply money must be put forward by the firm. But we tend to think of money spent on compliance as being an investment rather than a cost. We often make distinctions between the two. For example, our firm generally opposes composite examinations, because we think of them as costs in most cases, since we don’t believe there are always going to be benefits in having them done. However, we believe that compliance and verification to be investments, because benefits should be realized.

Yes, that means spending money, but you’ll benefit as a result. And, the amount you need to spend is likely not to be as high as you suspect!

Creating composites is difficult

It can be, but it isn’t necessarily so. We often find new clients initially struggling with this, but we provide them with assistance. Further, there is documentation available to assist, as well, as other aids we give our clients. In all likelihood, it’s not as bad as you think it will be.

The asset owners aren’t asking for it

They should be. It’s true, that in most cases, the superannuation funds aren’t requiring that their managers comply or even asking about compliance. That’s unfortunate, but in my opinion it also means there’s a lack of education.

I suggested that the one fund that’s been identified by the P-Group as requiring compliance be asked to send someone to iPARM in 2018 to explain why they have embraced GIPS. This may help motivate others to do the same.

Who is the asset owner, BTW?

An interesting epiphany occurred, at least for me, today, if not others in the room:

The superannuation funds are technically not asset owners!*

*Well, at least in the way GIPS thinks of asset owners, and perhaps the way many others do, too!

Superannuation funds generally compete for business from investors throughout Australia (and New Zealand). These individuals get to choose who to manage their money, and may change managers, if they wish. And so, the asset owners are actually the individual investors.

Am I being “nit picky”? Not at all. In the States we have “manager of managers,” who, like many of these funds, develop asset allocation strategies for their clients (members), and select the managers to do the investing.

I can see that from the perspective of the individual asset managers who are vying for business with the superannuation funds, these funds are the owners of the assets that they wish to be managing. And so, we could see that these funds play a bit of a dual role: they’re asset managers of their members, as they provide the strategies, come up with the allocations, and make the manager selections; and, they’re “asset owners” to the individual asset managers. For GIPS purposes, if the funds wished to comply, they’d comply, most likely, to the asset manager, not asset owner, rules.

Most of the plans are DC (Defined Contribution), not DB (Defined Benefit), so compliance wouldn’t work!

I heard this today. My response: of course it would!

In the States, we have a plethora of DC plans, too. And, the managers who compete for this business often comply with GIPS. But why would they, especially since the individual investors (a) aren’t asking about GIPS and (b) never heard of it? Well, because

  • GIPS is “best practice”
  • GIPS are ethical principals

By adopting the Standards and educating their clients and prospects about them, they can set themselves apart. They can obtain a marketing advantage.

They should explain that they made the investment to comply, in both money and resources, because the Standards are best practice, ethical principles, that promote full disclosure. That they’re globally recognized and endorsed by many countries throughout the world. And that they, the manager, strive to abide by best practice and, of course, also strive to follow ethical principles.

But why comply, if no one is asking for it?

Think about it: roughly 40 countries throughout the world, both developed and developing, have adopted the Standards. Why wouldn’t a firm or organization wish to follow best practice? Why wouldn’t they want to promote ethical principles?

In addition, compliance typically provides additional benefits, such as resulting in the development of formal policies and procedures, as well as better controls.

But Australia (and New Zealand) is different!

Yes, it is. And, it’s one of my favorite places to visit (despite the many hours it takes me to get here). But, the same can be said for many of the other countries where GIPS is being promoted and adopted. Why shouldn’t Australia (and New Zealand) be part of the global community that recognizes the many benefits of adoption?

  • Best practice
  • Ethical principals
  • Full disclosure
  • Demonstrate concern for the clients’ best interests
  • Provides additional benefits for the organization

Lots of reasons to comply!

We’ll hold a webinar soon geared to this market to help explain these points even more!

I could quickly determine that there is a fair amount of misunderstanding about the Standards. And so, we will host a free webinar in the near future, to provide education.

4 comments on “A “down under” lesson about GIPS®”

  1. Stephen Campisi says:
    October 24, 2017 at 9:18 am

    Your points are well taken, but a couple of them are a bit of a stretch. First, to say that something is not a “cost” but an “investment” is at best semantics and at worst it’s akin to cheap sales talk. In practical terms, it’s the same phrase that politicians use when they want to spend your tax dollars on dubious programs. If something has merit, it is justified as a “cost” because dollars go out the door in the hope of a greater benefit. Some firms simply don’t see value in compliance because their customer base doesn’t require it. That’s fair because GIPS isn’t for everyone, and it’s unwise to force it on anyone with artful phraseology. We are simply not in a position to tell anyone else what to do; at best we can recommend and leave it to them to make the choice that’s in their best interest.

    And this gets to your second point – that asset owners SHOULD BE requiring it. Again, you may know what someone else needs, but it remains their choice, regardless of your superior knowledge. You don’t see doctors chasing old men down the street with a flu shot in one hand and a rubber glove and an eager middle finger on the other, anxious to provide a rectal exam against prostate cancer. Might be good advice, but you simply can’t be too prescriptive…

    • David Spaulding says:
      January 19, 2018 at 4:59 pm

      Steve, sorry for not responding sooner. Our blog software is supposed to alert me whenever a comment is made; but, it is failing us: something to work on, I guess.

      I respectfully (I have to, with older men) disagree with you. No, using “investment” is not semantics nor is it cheap sales talk.

      An example: we very much support GIPS compliance AND GIPS verifications, believing that the money spent is AN INVESTMENT by the firm, as it is likely (provided they have decent performance) to lead to new business. However, we also believe that GIPS composite examinations are a COST, as it is doubtful the firm will see a return on it.

      There’s ROI, but there isn’t ROC.

      As for asset owners requiring it, I suspect that in most cases this is NOT necessary. Verifiers verify (a) the calculations and (b) that accounts are where they need to be. Yes, there are probably “Bernie Madoffs” still out there. But must the entire industry be penalized because of a very few crooks? I think not. The COSTS are quite high for them. Our clients are honest people. We see custodial records. We see their formulas. We validate membership. Their numbers are good. If they’re off, it’s by a de minimis amount.

      My thinking.

      BTW, you should have emailed me complaining I hadn’t posted a response! Geez!!!!! Darn software: failed me miserably!

  2. DILAN COORAY says:
    October 28, 2017 at 6:22 am

    Hi David,

    It was good meeting you in person at the iPARM conference. Do you think there are conflicts between the mandatory regulatory standards in Australia (i.e. FSC standards) and the optional GIPS standards?

    E.g. All unitised product offerings in Australia must have tax credits such as franking credits captured in post fee performance reporting. Refer the link below. Is this allowed by GIPS?
    https://www.fsc.org.au/resources/standards/2s_equity_trusts.pdf

    E.g. All unitised product offerings in Australia must calculate post fee performance based on redemption price (lower than both NAV price and application price). Refer the link below. Is this allowed by GIPS?
    https://www.fsc.org.au/resources/standards/6s_productperformance-calculationofreturns.pdf

    Cheers,
    Dilan

    • David Spaulding says:
      January 19, 2018 at 4:54 pm

      Dilan, sorry for not responding sooner. Our blog software is supposed to alert me whenever a comment is made; but, it is failing us: something to work on, I guess.

      I appreciate you reaching out. Last year’s iPARM was the best I’ve attended. But, I may never return, given my loss to Carl!!!

      There definitely is not a problem here. First, GIPS permits returns to be net of additional values: firms need only disclose what they are. Second, regulators “trump” (not Trump, he’s in the White House) GIPS, so the Standards will always give way to what the regulators say. Further, there may be opportunities to show both!

      Anyway, we are hopeful GIPS will catch on “down under!”

      Best wishes,
      Dave

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