We’re in discussions with a new GIPS (R) (Global Investment Performance Standards) verification client, which is a “lift out” from a prior firm. In reviewing their organizational makeup, some staffing questions arose for which there don’t appear clear answers. And so, I’ll present this as a generic topic and contrast lift outs with acquisitions. We’ll start with the easy one.
Let’s say that Firm A acquires Firm B, and that the portability rules apply (management comes across, they continue to manage money as they previously had, and they have the necessary records). Great!
Let’s look at Firm B:
- Founded in 2000 by John Smith, who was the firm’s first CIO (Chief Investment Officer). The first year, John did everything by himself.
- In 2004, he added Mary Jones to be the analyst.
- In 2005, he added Sam Johnson to be the trader.
- Mary and Sam became owners of the firm.
- In 2006, John was hit by that proverbial truck and was killed. Mary became the CIO and Sam became the analyst / trader.
- In 2007, they hired Don Doe to be the new trader.
- In 2008, Mary retired and the firm hired Fred Patel to be the CIO. Fred and Sam became owners.
- In 2009, both Don and Sam sold their interests in the firm to Fred and left. Fred hired replacements, Betty Brown and George Green, who came along with him when he sold the firm to Firm A in 2010.
And so, what do we have? A lot of turnover, right? Firm B has a 10-year track record, which is derived from a mix of individuals, none of whom at the time of the purchase was present for the full period; in fact, the most recent CIO was only there for two years and no one present was there any longer. And so, how much of the track record can be used by Firm A? I would say 100 percent, since the performance is the firm’s.
Now, let’s add a twist: what is described above is actually describing the autonomous U.S,. large cap equity group of an asset manager, XYZ; none of the players own anything: they’re all employees of XYZ. One big difference: in 2010, Fred and his team decided to leave XYZ and start their own firm. Same question: how much of the track record can be used? The answer, to me, isn’t so obvious.
Can Fred use any performance that precedes his arrival? Granted, XYZ did prior to his departure, because the performance of the team was owned by the firm. And during the past two years, Fred was first assisted by Jane and Sam and then by two new people he hired, so there’s inconsistency in the team’s makeup.
I would suggest that this scenario is quite common; it would be somewhat rare, I believe, to find the exact same team composition for an extensive period, especially ten years.
In my opinion, they should lay claim to only the period for which at least one member of the departing group was present. If during the period shown a major participant, such as the CIO, is replaced, then the composite disclosure should reflect this significant event.
However, we know that many companies buy the performance of other firms and call it their own. Firms acquire trademarks to obtain immediate recognition. The same, no doubt, occurs in the world of portability. And therefore, to prohibit the use of performance that predates any of the members of the team that were present at the time of the departure, would probably be considered to be excessive, by many. Therefore, I don’t see a strict prohibition; plus, the rules would be quite difficult to define. Instead, we might be okay with the rule that if the lift out includes periods that preceded the time any of the members of the lift out were present, then disclosures would be needed to reflect major changes in the makeup of the team. (Note that similar disclosures would be required under the acquisition scenario, too).
Does that make sense? Again, there is no guidance on this today, so this reflects my thinking, which is subject to change based upon additional insights I may discover or comments offered by others. Your thoughts are very much welcome on this topic.