Investment Performance Guy

Of late there has been some discussion happening regarding pension funds (and similar entities, such as endowments, foundations, and even central banks; i.e., “asset owners”) becoming compliant with the Global Investment Performance Standards (GIPS). I still think that the idea has merit, though it is important to understand why such a firm would (or perhaps should) seek compliance and what their conformity would mean. One cannot lose sight of the reason why we’ve the standards in the first place: to offer an ethical framework for asset managers to provide their previous performance to potential clients. This clearly doesn’t connect with pension funds.

So why would anyone want to undergo the time-consuming and costly exercise to accomplish compliance if they don’t really market their services? One reason is that the company is helped by it get their shop in order. It needs the establishment of policies and procedures, and along with that controls. Would the plan have only one multiple or amalgamated?

The plan might only have one portfolio, per se, that is split up across dozens or hundreds of smaller subportfolios even, each intended for a specific market segment. There can be justification to make a single amalgamated (for the entire collection) or multiple composites. If you opt for multiple, where each aligns with a subportfolio, what do the figures stand for? The performance of the manager.

Therefore, if an external manager has been used, it shall be their performance; if it’s an internal manager, it shall be his / her performance. But not the plan. And if the program is established as a single composite, then the performance is represented by the return of all managers in the aggregate.

But again, not the plan, because the plan’s performance can only just be measured in one way: using money-weighting. I’ve already had discussions on this topic with one pension account and a central bank or investment company, both of whom claim conformity. I cheer them on for wanting to comply, but that’s not sufficient as it does not tell them what’s most significant: how THEY are doing.

Yes, it is critical to monitor the managers, but this can be done without the GIPS requirements, and has been for many decades. Is a fresh standard needed? May I be so daring as to claim that this area of the market (pension money, endowments, etc.) would be better offered with a standard that is geared specifically to them. That might be more suitable. With but one standard, that is the only place one searches for answers. But, it must not be.

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