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.