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New performance standards represent a major opportunity for the Irish fund management industry Back  
Ireland, under the sponsorship of the Irish Association of Investment Managers (IAIM), became the very first country to adopt the Global Investment Performance Standards (GIPS) standards in May 2001, when the Investment Performance Council (IPC), an international industry-based group overseeing performance standards development, formally approved the Irish standard at its Los Angeles meeting. Five years on, Irish investment managers have just adopted a revised and updated version of the standards, which will remove barriers to accessing clients in other jurisdictions, and which represents a major opportunity for the Irish fund management industry, writes Joe Kavanagh.
On 1st January 2006, the major investment managers in 27 countries - including Ireland - adopted a common method of presenting the investment performance of the funds they manage which could offer them new opportunities in financial markets. For Irish fund managers the application of the revised and updated Global Investment Performance Standards (GIPS) will remove a barrier to accessing clients in other jurisdictions, making it easier to market their expertise there.

The new GIPS standards seek to provide prospective investors with the critical pieces of information they need to evaluate a fund’s performance. They benefit two main groups; investment management firms and investing (or prospective) clients. By complying with the GIPS standards, investment management firms assure prospective clients that the track record they report is both complete and fairly presented. Clients can also compare their performance with that of competing firms around the world on a comparable basis. Fair competition is enhanced in this way and clients develop a greater level of confidence in the integrity of the firms seeking their business. This benefits markets and investors alike.

The need for global standards has been increasingly obvious as investors have looked beyond their own markets for a healthy return on capital. The investment advisory community constantly scrutinise performance return databases available globally in the search for the best performers of tomorrow, but comparison can be skewed by any number of aberrations. A few sharp practices spring to mind:
• Representative accounts: cherry picking a top performing portfolio to represent the investment results of a specific mandate which is not indicative of the firm’s overall performance for that mandate type
• Survivorship bias: presenting an ‘average’ performance history that excludes lost accounts where weaker performance triggered a change in manager
• Varying time periods: presenting performance for a non-standard but especially selected time period during which the fund produced excellent returns or out-performed its benchmark

Even among the most ethical firms, making apples-to-apples comparisons of investment performance has been problematic. A pension fund looking to hire an investment manager might receive five different proposals, all using different methodologies for calculating results and providing those results in varying formats. Now there is one set of global performance standards which makes comparisons possible.
The first GIPS standards emerged in 1999 in response to growing demand from international investment firms and their customers for an agreed way of presenting performance. But there were forerunners. In the United States, the AIMR-PPS standards (Association for Investment Management and Research - Performance Presentation Standards) were launched in 1991 to provide underpinning to the provision of performance records and the comparison of results on the same basis. These standards gained rapid acceptance to a level that non-complying firms quickly found it difficult to win new business within the US institutional marketplace. In the UK the National Association of Pension Funds (NAPF) in 1992 issued a standardised code for the presentation of performance data for UK discretionary balanced pension fund accounts, and in 1996 a second voluntary standard for the presentation of track records for specialist accounts as well as a revised version of the code for balanced funds.

It was not long before the industries on both sides of the Atlantic began to see the need for convergence in the two approaches as pressure for cross-border activity began to grow. A group of highly motivated investment professionals from the UK, Europe and the US began talks in the mid-1990s which led to the creation of the Investment Performance Council (IPC), an international industry-based group overseeing performance standards development. CFA Institute, formerly AIMR, provided the secretariat function and assistance with the financing of IPC meetings. Together, the IPC and CFA Institute mobilised sufficient international resources to forge the first GIPS as a new set of international standards in 1999.
As the message about GIPS went out, trade associations and professional bodies in different countries became interested. A growing number wanted to adopt GIPS as the norm for their membership. In each case there would be an adoption procedure and the adopting organisation became the GIPS sponsor for that country, taking on responsibility for promoting and administering the GIPS standards there either in their original form or with subtle variations reflecting specific legal, regulatory, linguistic or other requirements. Ireland, under the sponsorship of the Irish Association of Investment Managers (IAIM), became the very first country to adopt the standards in May 2001, when the IPC formally approved the Irish standard at its Los Angeles meeting.

The ability to introduce some additional local provisions to the core GIPS standard resulted in a plethora of national standards, each of which was different from others in some small but locally significant way. For instance, in the UK, the NAPF as UK sponsor promoted the UKIPS (UK Investment Performance Standards), which stipulated that any fund manager claiming to be UKIPS-compliant needed the claim to be verified by a third party. The verification requirement was not new in the UK but it was not compulsory in GIPS, so the UK version added it back in.

The new GIPS standards of 2006 has incorporated most of the best practices already being followed by fund managers across the world and have resolved the main differences or nuances that previously created national variants. There can therefore be one global standard implemented everywhere and the national approaches will disappear. By far the biggest prize in this globalisation process is the US, where from 1 January 2006 the AIMR-PPS has been replaced by the same GIPS that everybody else will use. Bringing the US into line in this way will enable foreign fund managers to access US clients without having to restate their performance measurement results according to AIMR-PPS. GIPS-compliant firms will have a valid passport in performance measurement terms in the US or any other market where GIPS has become the norm.
The key issue that remains open is that of verification. This will not be a condition of GIPS compliance in the new standards, but is scheduled for review in the next GIPS global update in 2010. Irish fund managers have typically followed the practice more prevalent within the United States of voluntarily seeking independent verification of their compliance claims. This should prove to be a competitive advantage within a crowded international marketplace.

Later this year the first examinations in the new Certificate in Global Investment Performance Standards (CGIPS) will be held. This is a new certification programme designed to train highly qualified, ethically grounded performance measurement professionals who will master best practices in calculating, interpreting, and presenting investment performance statistics. A professional qualification in the area of performance measurement is a welcome development which can only help to raise the profile of the function and its importance within the new GIPS framework for communicating investment performance to prospective clients.
The tipping point for GIPS is coming: in the year ahead the new global GIPS standard and the CGIPS designation will add to the growing recognition within the industry and among investing clients alike of the need for high quality performance measurement techniques, performance presentation on a comparable basis and for the training of investment professionals into a new discipline of performance measurement. This will represent a major opportunity for the Irish fund management industry: all that remains is to seize it.

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