Finance ExpertSpeak: Mauritius must use GIPS standards to govern asset management
Iain McAra is Director, Global Investment Performance Standards, and was previously Vice President, US Performance Analysis Group for JPMorgan Asset Management in New York. Our finance expert spoke to AfricaMoney on how GIPS must be the flagship ethical standard in the country that is adopted by asset management firms for the calculation and presentation of investment performance. He noted that this would set a level playing field for local firms that claim compliance, as they can then be compared on an apples-to-apples basis with all other firms claiming compliance around the world.
Edited excerpts from an exclusive interview:
What is the main aim of setting up the GIPS framework?
This can be addressed both at a country level and also at an individual firm level.
At a country level, the presence of a local sponsoring organisation for investment performance standards, known as the country sponsor, is essential for effective, local implementation of the GIPS standards and ongoing development and operation within a country. Country sponsors ensure broad local representation and inclusivity so all local interested parties are permitted the opportunity to participate at the local level. The country sponsor, by actively supporting the GIPS and the Executive Committee, ensures that their country’s interests are taken into account as the GIPS standards are developed. Compliance with the GIPS standards by a firm that is managing assets is voluntary. Country sponsors are present in more than 35 countries in the EMEA, Asia Pacific and Americas regions.
At an individual firm level, the adoption of the framework that brings a firm into compliance with GIPS is essentiallythe firm’s adoption of a set of ethical principles surrounding the calculation and presentation of investment performance such that the firm always provides a full and fair presentation.
What benefits do investors reap when a country puts into place the GIPS framework?
When a country actively promotes an ethical framework and also educates their local industry, the investors who look for managers in the country that have adopted the framework can rest assured that they are receiving full, fair and comparable information about the manager’s ability to manage assets and that the information being presented has been compiled by following specific requirements and is supported by specific disclosures such that the investor receives a full and fair representation from the asset manager.
How conducive is the framework for portfolio/fund managers to undertake valuation activities?
GIPS is not solely about addressing valuation, but a consistent approach to valuation is necessary if the portfolio returns that are a function of the consecutive valuations are to be generated, following a consistent approach.
In general, the GIPS standards present a structured approach, that, when followed, will provide a consistent method to approach to all these activities such that information provided by the asset manager is comparable between managers and through time for all managers that adopt the standard. Because one of the key elements of GIPS is to generate and maintain policies and procedures that support the requirements of these high standards, a significant degree of internal control and therefore internal risk management is inherent in the adoption of the GIPS standards.
Specifically relating to valuation activities; GIPS recommends a specific valuation hierarchy and encourages firms to follow the recommended hierarchy but deviations from that hierarchy are allowed as long as they are disclosed. Again, given that valuation activities are being undertaken anyways for most asset managers,adoption of GIPS wouldpredominantly involve a rearrangement of the existing processes and the resourcing already dedicated to the valuation activities, coupled with documenting the policies and procedures that are being followed, to bring this function in line with GIPS requirements.
Moreover, does the framework encompass all types of securities or financial instruments across countries?
GIPS embraces all securities or financial instruments. There are specific sections that address Real Estate and Private Equity assets and a further guidance statement that specifically addresses alternative investment strategies and structures that address issues common to fund of fund structures and hedge fund type portfolios.
The Standards are designed to be dynamic so that they can respond to developments in the industry. Additional requirements and the evolution of existing requirements primarily occur through the introduction of guidance statements and question and answer items (Q&As), all of which are published by the Executive Committee so that the Standards remain relevant and up to date. Should a local rule or regulation conflict with a requirement of GIPS there is a specific requirement that enables a firm to adhere to the local law or regulation by disclosing in the GIPS compliant presentation which GIPS requirement could not be met because of the need to adhere to the local law / regulation.
Can you please explain in layman terms the technique or model being used for valuation under the GIPS framework?
The GIPS framework requires that an asset management company first identify what part of the company is going to claim compliance with GIPS. It is only the defined firm that is compliant or can claim compliance. Having determined which firm is going to claim compliance, all the actual (that means, not model, hypothetical, or back-tested) portfolios that are managed in that defined firm must now be sorted into groups where each group is a individually defined strategy or mandate to which the asset managers in the firm manage assets. All portfolios that are following the same instructions in terms of what strategy the portfolio should be following (based on the investment management agreements) are placed in the same group.
Having assigned all the portfolios, the performance of each of the groups is calculated by either 1) aggregating all the portfolio assets in the group and measuring the performance of the aggregate or 2) asset-weighting each component in the group and aggregating the asset weighted returns of the components to produce a return for the group. The group is referred to as a Composite. The returns being calculated must be total returns (capital plus income) and be for the total portfolio, including all cash that is held in the portfolio either as part of the asset allocation or as part of the residual (or frictional) cash that is in the portfolio to accommodate transactions, as a consequence of income items or necessary to ensure purchases or fees are settled appropriately. The returns being generated must be time weighted returns. As the purpose of the performance being presented is to present the manager’s ability to manage assets to the particular strategy that the composite represents, the only return that eliminates the impact of client-directed flows is the time weighted rate of return which can also be thought of as the return attributed to a consistent amount invested through time (say $1).
This is NOT a return that describes the return the client has experienced; it is the return that must be used so that managers’ abilities can be compared together. The presentation of the composite will show required quantitative (data) and qualitative (disclosures) information and the prospective client will be advised that additional information (such as policies and procedures and a list of all the composites that the firm supports) are available upon request. The complete presentation of a composite is known as the compliant presentation and an updated version must be delivered to every prospective client of the particular composite once every 12 month period at a minimum and as the initial communication once a prospective client of a strategy has been identified.
The portfolio assets are valued at least at the end of each month or additionally when there is a change to the asset base of the portfolio caused by either a client directed inflow or outflow. The valuation hierarchy is based on the requirement that all valuations should be the fair value; the definition of what is fair value can be determined by the manager but if it deviates materially from the recommended hierarchy that must be disclosed in the compliant presentation delivered to the prospective client.
In the African continent in general, and Mauritius in particular, can such an internationally best-in-class framework be aligned to existing local laws?
As mentioned earlier, GIPS accommodates local law and regulation by ensuring that if the compliant presentation conforms with laws and/or regulations that conflict with the requirements of the GIPS standards, firms must disclose this fact and disclose the manner in which the laws and/or regulations conflict with the GIPS standards.
Finally, do you have a message to convey to regulators in Mauritius in terms of the advantages the adoption of the GIPS framework poses for the island economy.
When a firm claims compliance with GIPS, the firm is indicating its commitment to generating and providing information regarding its investment performance in a full, fair and transparent fashion that adheres to a globally recognised set of ethical behaviours that is currently supported by the Country Sponsor in 35 countries and by individual investment managers operating in more than 40 countries with assets under management in excess of $20 trillion.
Aligning the asset management industry of Mauritius with GIPS and other ethical, global standards will provide credibility to the island as a place where local asset managers can be compared to asset managers across the globe that have adopted GIPS, and also indicates the island’s commitment to, and recognition that, combining ethical standards with professional ability provides investors with a trustworthy partner for their long-term wealth management requirements.
- By Wazna Gunga