LONDON - Performance data for specialist portfolios face tougher standards under draft guidelines published by a U.K. industry group.
The voluntary guidelines are designed to discourage misleading advertising and to help U.K. pension trustees evaluate performance data, said Peter Stanyer, chairman of the Pension Fund Investment Performance Code Monitoring Group, and investment director of Railpen Investments.
The most important changes under the voluntary code would:
Prevent money managers from creating composite returns for specific asset classes or sectors that are carved out of their balanced portfolio performance. Such data could be used only as supplementary information in the future. The dominance of balanced portfolios in the United Kingdom makes this a key issue.
Require inclusion of all specialist portfolios with similar benchmarks in calculating composite returns for a given asset class or geographic mandate. Now, portfolios with marginally different benchmarks can be dropped out.
Mandate managers to disclose whether their performance data has been formally audited. This might lead to greater auditing of data, Mr. Stanyer said.
"I think fund managers will be very keen to have this code coming out so that we have a level playing field," said Ian Hogg, managing director responsible for development at The WM Co., Edinburgh, who serves on the monitoring group.
The guidelines were drafted by representatives of the National Association of Pension Funds, the Institutional Fund Managers' Association, the Association of British Insurers and major U.K. performance measurers. The group issued performance guidelines for balanced portfolios in 1992.
Comments on the guidelines will be accepted through the end of July. Mr. Stanyer said he hopes final guidelines will be issued in the autumn.
U.S. performance measurement standards issued by the Association of Investment Management and Research, Charlottesville, Va., are far more detailed, as U.S. managers are responsible for measuring their own performance.
The British code can be less rigid because it would force money managers to submit their account data to independent performance measurers, Mr. Stanyer said. The WM Co., Edinburgh, and the Combined Actuarial Performance Services Ltd., Leeds, dominate performance measurement in Britain, unlike the highly fragmented market in the United States.
The guidelines are expected to cause major changes in performance reporting by managers marketing to U.K. pension funds, particularly because balanced accounts remain the major source of business.
Only about 30% of U.K. pension assets are managed in specialist portfolios; the prospects for greatest growth are for fixed-income portfolios, as maturing pension funds seek to match their liability exposure.
The proposed guidelines may upset managers who have little or no track record for specific geographic mandates or certain asset classes. Many U.K. managers rely on segmenting their balanced portfolio returns to derive a track record.
"The reality is a lot of people will be left with no track record, unable to compete," said Sue Douse, a senior consultant with Watson Wyatt Worldwide, Reigate.
The problems with using "carve-outs" as a substitute for a record in a specific area are numerous. For example, carve-outs from balanced portfolios exclude cash, thus distorting returns. Also, carve-outs may include a smaller number of stocks and countries represented in, say, continental European or Far Eastern portfolios than held in specialist mandates.
What's more, risk assumed or omitted for a particular portion of a balanced account might be offset elsewhere in the portfolio. For example, a global equities portfolio might balance an overexposure to U.S. health stocks with an underexposure to U.K. health stocks. That balancing wouldn't be reflected in segmented data.
Using a carve-out from a pooled fund also presents problems, because results are published after fees are deducted. The guidelines urge data before fees are taken out.
WM's Mr. Hogg said his firm does not permit carve-outs to be used in compiling data for specialist areas. John Clamp, chief executive of CAPS, said his firm's data can be broken down by specialist mandates, carve-outs and index trackers.
The guidelines may lead to expanded publication of rankings for specialist portfolios. Mr. Clamp said CAPS may do more in this area.
The draft guidelines would require money managers to include all relevant discretionary segregated and pooled portfolios for each type of account. Composites would be measured on a time-weighted basis and both weighted average and median returns would be displayed.
If a manager wanted to exclude a portfolio because of trustee-imposed investment restrictions, differing investment objectives or inclusion of assets in non-benchmark markets, the manager would have to obtain permission from the performance measurer in advance.
Accounts that share the same benchmark but have different risk tolerances could be separated, but all eligible accounts would have to be included in one or more composites.
Performance records should cover a minimum period of three calendar years, giving both annualized and year-by-year data. If the manager has been running specialist portfolios for less than three years, this would have to be explained and the longest available track record would have to be disclosed.
Managers also would have to state the number of funds and values of assets for which returns are shown at the end of each year.
The guidelines also include a model format for illustrating performance history, plus guidance for trustees to quiz managers on their claimed performance.