The Association for Investment Management and Research, with aid from foreign friends, promulgated in January its Global Investment Performance Standards. In several important respects the largely mandatory GIPS are more demanding than AIMR's initial, mainly voluntary, domestic Performance Presentation Standards of 1993.
The long-range objective of the GIPS is "to foster the notion of industry self-regulation on a global basis." Whether that objective will be reached may be guessed at by answering a few questions concerning the history of the domestic PPS, and by examining the resources that will support GIPS.
PPS Level I, we may remember, calls upon asset managers to place into unique and complete "composites" AIMR-sanctioned calculations recording the investment performance of all similarly guided and fee-paid discretionary portfolios.
In aggregate, each manager's composites must include, save for justifiable and clearly footnoted exceptions, any portfolio performance record, past or present, for that portfolio's entire period under management.
If collective thought can conceivably be labeled "ingenious," the AIMR team deserves that accolade with respect to its Level I "leveling" concept. To assure fairness in competition, as well as full truth in reporting, AIMR PPS Level I clearly precludes "cherry-picking" performance records to be displayed by managers.
Separately, PPS Level II deals with the usual audit procedures required for confirming the propriety and accuracy of per-portfolio performance calculations that, in the real world, may affirm composite soundness or uncover the rare case of specious reporting.
PPS, regrettably, has progressed unevenly enough to warrant trepidation respecting the future of the nouveau GIPS. As AIMR's own leaders admit, AIMR is neither constructed, equipped, populated nor authorized to serve as a vigorous "self-governing" body within the United States. Further, the voluntary features of the initial PPS, as well as early misconceptions, unacceptable costs, fund sponsor indifference and general acceptance of any firm's professed compliance, without examination, have hindered once-hoped-for PPS hegemony. Finally, the domestic accounting profession, via the American Institute of Certified Public Accountants, interfered fearlessly and frequently, distorting the primary AIMR Level I concept of fair play on a "level playing field." Domestic Level I or comprehensive composite verification is not endorsed by the AICPA, and long-promised and often rumored PPS Level I examination protocols for domestic certified public accountants never have appeared.
Repeated "Big 5" pressures led to rapid AIMR acquiescence to "Level II only" PPS examinations by CPAs in the United States. The resultant expensively wrought and widely relied upon verification letters simply beggar competitive equality based upon examination of any firm's complete composites. Irrespective of "Big 5" assurances of broadly based "Level II only" composite examination procedures, no domestic CPA firm can now attest to having performed a composite examination fully equivalent to Level I.
The hard irony is that, in accordance with the new GIPS, and under the more liberal rules and viewpoints of accounting and investment authorities abroad, the "Big 5" firms and others are issuing GIPS verifications at a great rate. Their procedures are based substantially upon the Level I type examinations not feasible in the United States.
We are left, I believe, with the United States perhaps half-covered by what passes for AIMR PPS compliance. A great part of that fractional coverage is at half-Level, or "Level II only." A careful reading of "full compliance" -- Level I plus Level II -- verification letters issued in earlier years is a revelation of ever-so-carefully stated partial- or non-compliance.
For asset managers, the degree of protection afforded at "Level II only," irrespective of cost, is wasted whenever manager-chosen "showcase" composites go out of style.
The essential solution, for our investment profession, for fund sponsors, for CPAs and overseas accountants, and for variegated sovereign regulators, must rest ultimately upon uniform, inescapable performance standards fully policed to preclude avoidance. The immediate hope for such global surveillance lies in the Investment Performance Council, newly born in Paris. The purpose of the IPC is to "promote the adoption and implementation of a single investment performance presentation standard throughout the world as the common method for calculating and presenting investment performance."
Note that "common" is not necessarily "exclusive," and the IPC delegates could not agree upon GIPS as everyone's "core" before local or regional add-ons. Nevertheless, "nous allons" from Paris! Seamless GIPS surveillance will indeed arise if IPC pushes long and hard for every money management firm to have a performance monitoring and compliance functionary equivalent in importance, let us say, to every U.S. broker/dealer's financial and operations officer. Each asset management firm needs a certified professional, highly trained, and tested in the extensive AIMR CFA fashion rather than through a single FINOPS-style exam. Grandfather the few and precious practitioners arising from the prolonged PPS/GIPS development process. Call them POPS if you wish.
Citing no individual names, the likes of fully active IPC committee persons from Frank Russell Co., or from Standish Ayer & Wood and Deloitte & Touche, might best personify PPS/GIPS grands peres.
Above all, do not permit mere CFAs, lawyers, CPAs or other branded types to function without rigorous training. We must have solid experience before GIPS training. As AIMR chairman emeritus Charlie Ellis has said, it takes 15 years to learn about our investment world.
The cost of the program? Take a small slice of the SEC budget and spread it over decades, as well as U.S. and foreign agencies. And watch verification costs dive when all firms have expert POPS on board to comply with the GIPS, and junior accountants conducting examinations need not discover anew what a composite really is.