Four years after the launch of the Global Investment Performance Standards (GIPS) to allow pension funds and other investors to compare fund managers, there is increased acceptance that refusing to comply might cost firms business.
This is a shift from the early years when first adopters tried to use their compliance as a way to win mandates against rivals. Although this change is seen as a success for self-regulation the standardisation process still has further to go and much of Europe is still only at an initial stage of development.
GIPS are ethical standards maintained by the US-based Association for Investment Management and Research, providing an asset manager’s investment performance
history in equities and bonds to ensure fair representation and
full disclosure.
The objective is to create readily-accepted presentations of investment performance results that are comparable without regard to national borders and allow asset managers’ clients to talk about the critical issues of how these results were achieved and the firms’ futures.
Developed in 1999, GIPS came into force in January 2000, nearly seven years after the first country-based standards had been published by the AIMR in the US. As at February, 19 countries around the world, with the majority in Europe, have used GIPS as the standard for reporting (called GIPS and translated GIPS), or as the basis for local requirements where local laws require slight amendments (country variation GIPS – CVG).
In another five countries - Egypt, Germany, Spain, South Africa and Sweden - endorsement by the AIMR’s Investment Performance Council is underway. But not all fund managers working in the GIPS-endorsed countries have implemented GIPS within their own firm.
The UK has a CVG called the UK Investment Performance Standards passed in November 2001. David Gould, at the UK’s National Association of Pension Funds and chairman of the Investment Performance Council (IPC), says: “The take up in the UK is reasonably high. There is a list of questions trustees ask fund managers about_GIPS.”
Last autumn the IPC surveyed 80 firms in the UK as a representative sample of the industry. Of the 37 valid responses 70% were GIPS compliant, and of those others 64% were actively seeking compliance. This was up from the UK’s 56% compliance rates, in a 2002 survey carried out by the Spaulding Group.
Stefan Illmer, chairman of the European Investment Performance Committee and head of products at Credit Suisee Asset Management, says that asset managers based in the UK and Switzerland are the most compliant and verified by external consultants, although no similar survey to that in the UK had been carried out on the continent. In small countries and those in eastern Europe not many were compliant, he added.
Jon Little and Alan Mearns, CEO and head of global marketing, respectively, at Mellon Global Investments, which is fully GIPS compliant, says there is a split between the less compliant southern and eastern Europe and the Scandinavian, Dutch and UK markets.
Mearns adds that the newer the market the more pro-GIPS it was, partly due to the influence of supranational organisations advising them on developing the local asset management industry. It is “almost that established markets are moving more slowly”, he says.
Consultants and fund managers put the cost at between €100,000 and €500,000 or more to become compliant for large fund managers, with this cost being subsumed within the marketing budget of the firms rather than being passed on to clients directly in the form of higher fees.
Little says despite the slow pace of development, the cost of becoming GIPS compliant, which for one of Mellon’s fund managers, Newton, was more than €100,000, was important. “It is a not inconsiderable expens,e but worth it. GIPS are almost a prerequisite by consultants at the pre-completion stage. We are not yet to the point of being turned away without GIPS but this is coming closer.”
Stephen Bidwell, head of performance measurement at JPMorgan Fleming Asset Management, says this questioning had been a definite change in the last two or three years. “All requests for proposals worldwide ask if we_are GIPS compliant.”
Deborah Reidy, of Hewitt in Dublin and formerly at the €9.6bn National Pensions Reserve Fund of Ireland, who also sits on GIPS IPC, says the GIPS question was an elimination requirement in the fund’s latest two mandates. “Three years ago it was not an elimination requirement but now it_is. Most groups are compliant now. Three years ago more were only intending to.”
Hans Braker, senior consultant at Aon Investment Consulting in the Netherlands, says: “There has been quite a drive to become GIPS compliant. Many pension funds are aware of it now. In a search for investment manager it is a commonly asked question. Fund managers are working towards or are GIPS compliant as a way to avoid competitive disadvantage. Ten years ago there was a competitive advantage in being compliant!”
But others were less certain of GIPS acceptance. Hartmut Leser, managing partner Feri Institutional management says: “For the German market we can say GIPS does not play a big role. It possibly should, but does not. Institutional investors do not pay too much attention to the investment managers who use it.”
And the IPC’s survey of UK fund managers GIPS compliance found even here client/consultant demand was the main pressure for only 16.7% of respondents becoming
verified. The report on the Mandatory Verification Survey Responses survey said: “The statistics reveal there is little direct pressure from clients and - more disappointingly- investment consultants are not doing enough to encourage fund managers to become compliant and externally verified.”
Leser says the main hindrance to wider requests for GIPS was uncertainty of its usefulness. GIPS require a five-year track record, if possible, for comparison but many mandates or funds are run to specific requirements and then aggregated into a composite of individual portfolios run to similar strategies. Leser says groups had a certain degree of latitude in what was in the composites and “so results are not very valid at the moment”.
Braker at Aon agrees that GIPS means it is no longer possible for fund managers to hide their worst-performing portfolios, but it is very difficult to compare between groups as the definitions of composites changed.
Leser also thinks the use of past performance is of limited value to clients. This is partly due to the effect of random factors outweighing investment process in short return periods of three years, but also because a fund manager’s style and focus are completely changing at the moment.
Illmer at the EIPC responds and sums up others’ views. He says: “Past performance only shows good investment process, not future performance. But clients can use GIPS to get a feeling of the product and then ask specific questions.”
And Leser agrees that over time the changes in the asset management industry would settle down. “We are in the beginning of being forced to [present information in the same_way] so their worth will go up.”
This development is the next stage of the GIPS process. The AIMR is consulting on moving to a gold standard for introduction in 2006. Gold GIPS would remove country variations, such as different time horizons or mandatory verification, and widen GIPS to other asset classes, such as real estate and private equity, and add requirements on issues such as advertising and fees.
All parties questioned agree gold GIPS would be useful in principle but, as Mearns at Mellon says: “The devil is in the detail. If gold GIPS has an in-built bias then that is an issue.”
But momentum still appears to be there for GIPS and despite the expense and difficulty of becoming compliant all parties involved in institutional investment management appear confident of its usefulness in the future.