Performance and the Euro
A set of guidelines has been issued in Brussels which aims to ensure that when the euro is introduced, investment performance measures only ever compare like with like.
The providers and users of performance comparisons will have to accept that ECD (Euro Conversion Date) will create a discontinuity in many cases," says the European Federation of Financial Analysts Societies' (EFFAS) Permanent Commission on Performance Measurement in its guidelines in respect of the impact of euro conversion, drawn up recently.
The group acknowledges that after next year, it will often be useful to show data in a continuous series in-cluding periods spanning the currency change. Data after ECD can naturally be expressed in euro, but how to present them prior to ECD is a major is-sue, says EFFAS. In all cases, the guidelines set out, the original currency must be shown.
Although for convenience, individual clients may want to see historical values converted into euro at the fixed exchange rate for their local currency, it is vital that this data always retains the label of its original currency. Ac-cording to the guidelines, this should be worded as, for example, 'French francs converted to euro at the fixed exchange rate' or 'FFr(Eur)'.
Fund performances which were not validly comparable before Emu cannot become retrospectively comparable by virtue of the creation of the euro, the guidelines states as one of the overriding principles.
"If you have data in French francs, people are going to want to look at that history in euro, which is perfectly un-derstandable. What mustn't be done is that history is compared with one which was originally in German marks," says Dugald Eadie, chairman of the Permanent Commission and managing director of Henderson Investors in London.
"No one in their right mind would compare a historical series in French francs and German marks," he adds.
Although bond yields and equity re-turns in Emu currencies have converg-ed to some extent, historically the disparity has been huge. For example, if after ECD historical performance data for an Italian bond fund and a German bond fund lacked any reference to the original currency, this would be highly misleading to any investor.
The EFFAS guidelines on handling the switch to euro are aimed at marketing people dealing with histories of funds, but they have implications for everyone, says Eadie. Professionals in fund management are likely to follow the voluntary code, he say. "The issue is whether we can get journalists, and those using the internet to recognise the pitfalls," he adds.
For individual clients, the conversion to euro should have no effect on historical performance data, the guidelines note. However, individual clients will still need to watch out when comparing their own performance against an external measure.
The problems go far beyond performance measurement, says Eadie. The history of GDP of individual EMU countries could be presented in a misleading manner if the guidelines are not followed on treating pre-ECD data later converted to euro converted. "I can think of lots of times when things might go off the rails," he says. Rachel Fixsen"