Preaching about conversion
While many funds have or are in the process of redenominating, the process will continue for up to three years, with some funds waiting until their accounting year ends or other suitable administrative time. The technical team at S&P's Micropal, headed by Andy Pettit, has been working with a number of organisations, including EFFAS, FEFSI and AUTIF, in the development of guidelines for the calculation and presentation of fund performance comparative ranking figures in the Euro-zone.
The EFFAS principles have emerged as the basis upon which a number of investment fund trade bodies are basing their own recommendations. For funds created after 1 January 1999, performances will be available in euro or any legacy currency.
Historic performances will be available in euro, only via converting all values, pre 1999, into a common currency, using the fixed conversion rate for that currency (referred to as euro ex FFr, euro ex DM, etc) and in any legacy currency.
To illustrate the comparison problems, consider two funds, one de-nominated in deutschmarks and one in francs. Although their returns may appear to be stated in euro, they are not directly comparable as one is created at the euro/FFr conversion rate, and one at the euro/DM rate.
Effectively, the two returns remain FFr and DM respectively, with no historic currency fluctuations applied to the series and therefore not directly comparable. To ensure comparability, they must first be converted to any common currency (usually that of the particular investor).
All conversions of unit values prior to January will be at actual foreign ex-change rates ruling on each day (cross rates via euro). All euro conversion rates will be to six significant figures.
A number of applications may apply estimated historic values for a euro -for example, based on the ECU, or by weighting historic records of 'in' currencies by some value (market capitalisation, GDP). Most specifically in this context will be index vendors calculating historic index values for new 'euro' index series. Such historic, synthetic values may exist in S&P's Micropal products. However, they will only be used to enable access to historic data generated on new indices and will not be applied to any other series in anyother calculations.
Total return data for periods prior to Euro Conversion date (ECD) can be chain-linked with post-ECD returns, but the original currency of the historical data must be disclosed.
Although time series of total returns in different member currencies may converge into a common euro series, the individual histories must be kept separate. Nominal amounts (such as price, value, net asset value, dividends or earnings) pose a particular difficulty. For convenience, it is likely that an individual client will wish to see historical values converted to euro at the fixed exchange rate for his individual local currency. Otherwise, any time series would have a discontinuity at ECD. Computer systems used for investment accounting and/or performance measurement may store the historical data in whichever way is practical for the particular application. However, it will always be necessary to keep track of the original currency of any data, even if it is converted at the ECD euro exchange rate to make subsequent analysis easier. As a result of EMU, it is likely that individual benchmarks and objectives will change for many portfolios and funds. As a result, both composites (used by investment managers for performance presentation) and peer groups (used by external providers of performance measurement data) will change. The providers and users of performance comparisons will have to accept that ECD will create a discontinuity in many cases. Performance providers must check that portfolios or funds have maintained similar investment objectives during the period under review before aggregating portfolios or combining peer groups or composites.