IPC-Invitation to Comment

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• Publié par: Metheg
• Nombre de lectures: 20
• Langue: English

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Professional Standards and Advocacy
Association for Investment Management and Research
P.O. Box 3668
Charlottesville, Virginia 22903
E-mail: [e-mail]
Basle, 27. December 2001
A.170.1/SH
Invitation to Comment: Performance Standards
Dear Madam, Dear Sir
On behalf of our Performance Standard experts please accept our thanks for giving us
the occasion to comment on the proposed guidance statements.
A. Proposed Guidance Statement on Definition of the Firm
Do you agree with the principles established in the Guidance Statement?
Basically yes, except for some aspects noted below.
Definition of business entity:
- A firm can be defined as an entity “using a separate and distinct research proc-
ess”. We suggest formulating “using a separate and distinct investment manage-
ment and decision-making process”, as limiting the definition to research only
may not be practicable: Some firms outsource research to third parties while still
managing assets at their own discretion.
- The statement “if a firm holds itself out as a separate entity yet does not maintain
its own autonomous investment process, it cannot be defined as a firm” is rather
obscure. We suggest deleting the sentence for the following reason: the Stan-
dards do not provide a clear definition of the term “investment process”, which
leaves it prone to interpretation. Furthermore, the definition may not be applica-
ble to multinational firms. For example, a foreign subsidiary of a multinational
bank managing assets autonomously at its own discretion and as a separate en-
tity, but outsourcing research from its parent company, may face problems when
trying to apply the proposed rule to define itself as a separate firm for PPS pur-
poses.2- We consider the guidance that “firms are strongly encouraged to adopt the
broadest possible definition of the firm” and that the scope of this definition
should include “all geographic offices (country, regional, etc.) operating under
the same parent company…” as difficult to implement. While agreeing with this
proposition in general, we believe that it is not feasible for globally-operating
multinational companies in many cases. In particular, the need to include all geo-
graphic locations of the entity into one PPS firm may slow down or even hamper
the process of implementation of the Standards (the first entities to be compliant
will have to wait for the others becoming compliant).
Definition of the base currency:
We suggest that this option be removed from the Standards with immediate effect
for the following reasons:
- The definition of the firm on the basis of “the currency in which the client has
specified the portfolio should be managed” or on “the currency that is used to
determine the portfolio’s valuation” creates problem, because the currency in
which a portfolio is managed and the currency of valuation are not necessarily
the same. A portfolio can be reported/valued in CHF but still have USD as the un-
derlying currency for the investment strategy. Moreover, a portfolio valuation can
be reported to the client in two or three currencies. What happens if a client
changes its reporting currency?
- The use of a base currency for the definition of a firm is not in line with the phi-
losophy of the Standards (e.g. broadest definition of a firm). The base currency is
not a more decisive factor for a firm definition than e.g. a standard investment
product or a strategy. However, the Standards do not provide an option to define
a firm on the basis of standard investment products. We believe that a base cur-
rency as a criterion for the definition of a firm creates room for ambiguity and
cherry-picking.
The Statement that “changes in investment style or personnel are not valid reasons
for re-defining the firm” should be clarified. A change in investment style or the in-
vestment team may well be as significant as if a new firm had been created. This as-
pect is closely related to the problem of inception of the firm, which is discussed be-
low.
Are there other elements involved in defining the firm that are not included?
We believe that in addition to the three most fundamental issues that a firm must
consider when becoming compliant (definition of the firm, discretion and compos-
ites) the Standards should address another fundamental issue: the inception of a
firm.
The current Standards do not provide clear criteria for the definition of the inception
date of a firm in the case of a retroactive claim of compliance. The problem arises3when a firm which has already been in existence for some time decides to claim
compliance with the Standards, and thus has to prepare the required performance
history to be presented retroactively (5 years or since the inception). If the firm has
been restructured significantly since its founding, the inception date of the firm as
defined for the Standards may be different from the date of legal establishment of
the firm. This said, it is clear that a simple name change is not a sufficient reason to
alter the firm’s inception date.
The Standards do not stipulate major changes as a reason to redefine the inception
date of a firm. In the absence of clear guidance in the Standards, such situations may
lead to disagreement with verifiers and hamper the compliance process.
Do you agree with the proposed Implementation Date?
We would suggest setting the Adoption Date of January 1, 2003 to allow firms which
are currently in the process of implementation of the Standards enough time to re-
consider the way they are going to define themselves as firm.
B. Proposed Guidance Statement on Composite Definition
Do you agree with the principles established in the Guidance Statement?
Generally we agree with the proposed principles except for the following.
Investment Guidelines – Multi-Asset Portfolios “Only multi-asset portfolios for which
the firm has discretion over the asset mix are to be included in multi-asset compos-
ites”. This guidance is not absolutely clear with respect to what happens if the firm
does not have absolute discretion over the asset mix, for example, when a firm re-
ceives the strategic asset allocation guidelines from the client with respect to asset
class mix (percentage of equity, bonds, etc.) but still has discretion over the tactical
asset allocation and choice of securities. If in this case the firm is not allowed to in-
clude such a portfolio in multi-asset composite, the only solution left to the firm is to
carve-out the asset-classes and put them into single-asset composite. However, if a
firm does not meet the criteria of GIPS 3.A.7., this would only be possible till
1.1.2005.
We suggest providing additional clarification of the term “discretion over asset mix”
and the treatment of the balanced portfolios.
Do you agree with the treatment of portfolios that fall below a minimum asset level?
Generally we agree with the proposed treatment except for the following.
The guidance “if the portfolio falls below the minimum due to market movements,
the firm must leave the portfolio in the original composite until there is a docu-
mented change in client guidelines or acknowledgement from the client that the firm4considers the portfolio too small to implement the composite strategy” should be
deleted:
- The fact that a portfolio falls below the minimum portfolio size does not neces-
sarily mean that it is too small to implement the strategy (e.g. for the strategies
invested through mutual funds a portfolio size may not be that important) but
rather means that a portfolio is not representative due to its low weight in the
composite. The sole fact that the size of a portfolio falls below the minimum port-
folio size does not imply a need to change the clients’ investment guidelines.
- The proposed treatment would be difficult to implement in practice as in private
banking firms do not always have frequent access to all clients. To obtain docu-
mented acknowledgements in time may be difficult.
A firm can have quite a few portfolios just slightly above the minimum portfolio level
which would be susceptible to frequent short-term fluctuations around the minimum
portfolio size. To avoid frequent “ins” and “outs” of portfolios, we would rather sug-
gest defining a time frame (i.e. a number of consecutive days) after which a portfolio
should be excluded from the composite because it has fallen below the minimum
size.
Should firms be allowed to exclude a portion of a portfolio as non-discretionary?
Basically yes. However, on the basis of our experience we think that this is often not
feasible in practice. Exclusion of a non-discretionary portion of a portfolio would re-
quire the creation and administration of “sub-accounts” which would be very diffi-
cult to implement (IT).
How should portfolios with different measurement periods be treated?
We agree with the proposed guidance.
Do you agree with the proposed Implementation Date of April 1, 2002?
We suggest setting the Adoption Date of January 1, 2003 to allow firms which are
currently in the process of implementation of the Standards enough time to recon-
sider the way they will define their composites.
C. Proposed Real Estate Provisions to the GIPS Standards
Do you support AIMR’s effort to develop global real estate provisions to be added to
the GIPS standards?
Yes, we do support