It is well known that the GIPS Standards were designed to provide transparency to investors across investment managers - to effectively create an apples-to-apples mechanism for understanding performance and uncovering talent. When GIPS launched, they were a regionally focused set of optional rules that were quickly adopted on a global scale. In short order, they became a competitive advantage to those firms who chose to follow, and allowed investment management firms to attract customers. A formal GIPS Verification process soon followed and helped the cause even further - to engender trust amongst investors in a given firm’s results and help the investor decide to whom their business is awarded.
I’ve been thinking about the genesis of the GIPS standards, and the intersection with the SEC-mandated Statement of Additional Information (SAI) for the U.S. Mutual Fund industry from 2005. The SAI calls for registered management investment companies to improve disclosure regarding their portfolio managers. The tenets between GIPS and the SAI are the same - provide a baseline by which investors can understand the foundation of performance, and increase transparency between the investment team and the investor.
Thinking about the parallels, I wondered, is there a need for a more formalized disclosure of individual managers’ contributions to alpha or creation of beta? Beyond Mutual Funds and their investors, can the broader investment management community benefit from the structured results of the GIPS standards, or the SAI?
It is no secret that investors are increasingly choosing passive management, seeking a low fee in return for a predictable’ish return (in relation to the benchmark). Active managers are bending over backwards to retain their existing customers, and attract new ones. The pressure from investors is rising - what was once a ludicrous request is now mundane. If one investment manager can’t meet an investor’s demands, the firm down the street will do so. Performance, attribution and risk results are all now provided as a regular set of analytics to the investor - each portion providing a window into the return of the portfolio or fund.
Enter the individual portfolio manager, whose performance when linked with long term performance based incentives is higher than those without (say, AUM based or fixed salary). The existence of a performance based incentive naturally attracts the more skilled portfolio managers to the firm, as it allows them to maximize their earnings. Studies have similarly shown that the correlation between portfolio manager tenure and risk adjusted performance is high, leading to trust. But what about the short tenured manager, are they taking more risk than they should to boost performance returns?
The U.S. Mutual Fund industry has required disclosure of manager tenure, compensation type, and benchmark choice (amongst others) as a way of ensuring the goals of the investor are in line with the methods of the manager. Can we apply similar disclosures to other investment vehicles, and use them to serve both the investor and the investment manager? Can’t this help the manager in her conversation with the client, and the client in his conversation with the manager, prove that they’re marching toward the same goal?
Join the Discussion. How does your firm address the correlations between overall portfolio results vs. manager performance? BISAM has helped to solve this problem for multiple customers. We invite our readers with similar challenges to learn how best to leverage B-One to address manager reporting requirements.