Mark J. Kovaleski, BridgeTower Media Newswires
Wednesday the S&P 500 hit a major milestone: the longest bull market ever for the index, stretching 3,453 days since hitting a bottom in March 2009. Recent glances at your 401(k) balance or investment statements over the last few years have probably made you smile, but do you truly understand how the performance numbers are being calculated and how to properly compare them to other return information or benchmarks?
An ever-increasing number of individuals are choosing to have their investments managed by professional money managers with the hope of achieving superior long-term returns. When deciding among competing investment managers most individuals look to past performance. Individual investors are constantly reminded that past performance does not guarantee future results. However, this is still an important factor. Equally important is understanding how past performance results have been calculated.
Investors have had great difficulty obtaining meaningful comparisons of accurate investment performance data. Making apples-to-apples comparisons of investment performance can be problematic, and the existence of region-specific guidelines for performance presentation further complicates matters.
In the absence of regulated standards, investment managers have tremendous freedom when presenting their historical performance. Managers have manipulated past performance in numerous ways. They have presented results for only a select number of outperforming accounts, chosen time periods that do not include poor performance periods or removed terminated accounts from past performance results.
So, where are the standards in this multibillion dollar industry?
This need for a practitioner-driven set of ethical principles and a standardized, industry-wide approach to calculating and reporting investment results led the Association for Investment Management and Research (AIMR, now known as CFA Institute) to sponsor, develop and publish a minimum global standard by which firms could calculate and present their investment results. Hence, the Global Investment Performance Standards (GIPS) were created.
The foundation for the GIPS standards was first established in 1987 with the creation of the AIMR Performance Presentation Standards (AIMR-PPS), voluntary performance guidelines for the North American investment management industry.
The GIPS standards encourage full and fair disclosure of results. Although the Standards are not a requirement when presenting performance results, the marketplace has deemed their adoption essential.
The establishment of a voluntary global investment performance standard leads to an accepted set of best practices for calculating and presenting investment performance that is readily comparable among investment firms, regardless of geographic location. These standards also facilitate a dialogue between investment firms and their existing and prospective clients regarding investment performance.
The GIPS Executive Committee serves as the decision making authority for the GIPS Standards. The goals of the committee are:
• To establish investment industry best practices for calculating and presenting investment performance that promote investor interests and instill investor confidence;
• To obtain worldwide acceptance of a single standard for the calculation and presentation of investment performance based on the principles of fair representation and full disclosure;
• To promote the use of accurate and consistent investment performance data;
• To encourage fair, global competition among investment firms without creating barriers to entry; and
• To foster the notion of industry “self-regulation” on a global basis.
Investment managers that adhere to the requirements in the Standards can claim that their performance presentation is GIPS compliant. The next step in the process is to have your performance results verified by an independent third party, usually a CPA firm. This verification provides the top level of assurance that the investment manager’s performance presentation is in accordance with the GIPS Standards as verified by an independent firm. Verification may also provide improved internal processes and procedures as well as marketing advantages to the investment advisor. In addition to a verification, a firm may choose to have a specifically focused performance examination of a particular composite.
Compliance with the Standards and independent verification continue to gather momentum from demand in the marketplace. Investment management firms see compliance with the Standards as an integral component in marketing their firm’s performance results. Institutions and consultants have viewed compliance with the Standards as a prerequisite for many years. Why should the individual investor settle for anything less?
A savvy individual investor should ask his manager if they are GIPS compliant and if they are verified. A blank stare is not bad news, just a gentle reminder to demand the best from your investment manager. It is one of the individual’s best hopes for a uniform method of comparing investment returns.
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Mark J. Kovaleski is a certified public accountant and partner with Mengel, Metzger, Barr & Co. LLP. He may be reached at Mkovaleski@mmb-co.com.
