The accuracy of money management performance results could be in question for returns calculated using Intel Corp.'s flawed Pentium 90 computer chip, but any differences are likely to be minimal, industry experts say.
Performance measurement and investment accounting are two areas in which a calculation error could dilute client confidence in the industry, experts say. The perception that a money manager is using flawed data might be a concern for clients, even if the difference is inconsequential, consultants said.
Although the likelihood for error appears to be small, the stakes could be large if calculations are used on large sums of money. Moreover, managers and consultants say it is important for the industry to avoid any potential for differences that could be caused by the chip, given the nature of the investment industry.
David Spaulding, president of The Spaulding Group, a Somerset, N.J., money management consulting firm, said it's "reasonable to be concerned" about a manager using the Pentium chip to calculate investment returns. "In performance measurement, there is a lot of division that goes on."
Two pension consulting firms -Frank Russell Co., Tacoma, Wash., and SEI Corp., Wayne, Pa. - have acted to verify whether a Pentium-related error has affected its data.
Steve Sundquist, Russell chief information officer, said executives approached the Pentium situation both as a user and as an evaluator of the money management business.
So far, Russell hasn't found any problems with the integrity of its own data, Mr. Sundquist said.
While Intel forecast a problem only once in every 27,000 years, IBM Corp. estimated an error every 24 days. Mr. Sundquist said Russell wanted an objective prediction of the probable error rate with the Pentium chip and relied on a study by Stanford University, which placed the error rate between those suggested by Intel and IBM. A study by PC Week estimated errors every two months to 10 years.
Last week, Intel offered to replace flawed Pentium chips at no charge.
"With regard to performance measurement, Russell is in a good position," Mr. Sundquist said. "Most of the data received from managers is probably not coming from Pentium calculations, since most managers are calculating their performance data on a mainframe."
As a standard practice, Russell verifies the performance returns of a portion of the list of money managers it tracks on its own mainframe computers, using portfolio transaction data for each quarter. For those managers not on its verification list, Mr. Sundquist said the company has a pretty good sense of which managers might be using a Pentium processor.
"We are reinforcing our own reasonability check for managers, where we scrutinize those returns on a regular basis anyway for irregularities. ... So far, we haven't really found anything outrageous," he said.
When SEI learned about the problem, it informally sampled the money manager universes and found most managers probably weren't using the Pentium chip, said David Grantson, a company spokesman.
SEI calculates median returns for money managers from data supplied by custodian banks that use mini-mainframe computers.
"We also doublecheck the data as well for the various asset universes, looking for managers that stand out with unusual returns or wildly different returns. We'll then start asking questions," Mr. Grantson said.
"SEI internally has been doing a beta study of 25 computers with Pentium chips and hasn't seen any problems," Mr. Grantson said. SEI calculated its data twice - on a Pentium machine and a machine not using a Pentium chip - and got the same result, he said.
"Our feeling is that if one or two managers in a universe of 1,124 domestic equity managers report incorrect numbers because of a Pentium mistake and we don't catch it, it won't make a difference to the aggregate numbers and median return," he said.
"We aren't worried enough to insist the Pentium chip be replaced or recalled. We will, in fact, buy more Pentiums because they are faster. We use the machines with Pentium chips for a wide variety of applications throughout the company."
Mike Henkel, managing director for Ibbotson Associates, Chicago, said any problems from a Pentium chip are going to turn up in accounting applications - not in investment, asset allocation or manager performance. The errors are too small to actually show up, he said. But, he added, "if you're running your accounting systems (on a Pentium), you'd better be worried." Ibbotson uses several Pentium-equipped computers and is not concerned about miscalculations, he said.
Some managers and consultants say any problems may be more related to client confidence.
Kevin M. Johnson, partner with money manager Aronson + Fogler, Philadelphia, said "it's as much a problem of perception than reality." Any errors are likely to be small. But when a manager is dealing with a client's assets, you get the problem corrected as soon as possible, he said.
Heinz Binggeli, a managing director for Emcor, an Irvington, N.Y., consultant and money manager, agreed Pentium-related errors are likely to be minimal on the investment side. But the possibility exists that a single error could get multiplied upon itself -for example in a Monte Carlo simulation, where a thousand scenarios are simulated. Emcor plans to replace its single Pentium-equipped computer, used for consulting, Mr. Binggeli said.
Ron Surz, principal, Performance Presentation Consulting Alliance, said the potential for Pentium-related performance reporting errors is smaller than potential errors coming from other sources. Inaccurate portfolio pricing, particularly in fixed income, as well as exclusion of portfolio cash flows are two ways that probably contribute to greater degrees of inaccuracy, he said.
Others in the industry are responding in different ways to Intel's acknowledgement that errors could occur in spreadsheet calculations. An error is most likely when dividing two large numbers into each other, according to computer industry reports.
William Kirchhoff, equity systems manager for the Florida State Board of Administration, Tallahassee, said the board just purchased Pentium-equipped computers this year, but use them only for word processing and multimedia applications.
But the consequences of getting an error using numbers "can be pretty scary," so the fund won't be buying any Pentium-equipped computers, he said.
Likewise, a spokesman for the California Public Employees' Retirement System, Sacramento, said the fund had one computer with a Pentium chip being tested by the system. Following news of the problem, the system is "not going to buy any more Pentiums."
At Richards & Tierney Inc., Chicago, Charles McPike, managing partner, said the firm uses a computer with a Pentium chip, but because the firm's consultants have written their own software, its data has been isolated from any Pentium problems.
"The people who are most in jeopardy from the Pentium chip's problem are those who trust someone else's software. Even then, they may not be much at risk, although IBM did offer a financial calculation example where the Pentium created a $46,000 error. For a pension fund with billions of dollars, an error in the cents, which is where the Pentium problem would kick in, might be even more costly," said Mr. McPike.