How many of us have heard of PPS, Performance Presentation Standards or GIPS - Global Investment Performance Standards?
Recognizing the need for promoting uniformity in reporting investment performance, the Association for Investment Management and Research (AIMR) in the US developed and introduced PPS in 1993. These standards allow investors to directly compare the performance of different investment managers, helping to build an environment of credibility and trust in the investment industry.
Popularity of the standards has spread rapidly around the world and today similar standards exist in most European countries and in Australia.
In 1999, the AIMR introduced Global Investment Performance Standards (GIPS), which consists of a core standard for investment performance intended to form a basis for global acceptance. This core standard aims to become a worldwide standard promoting accurate and consistent data, global competition and a notion for self regulation. GIPS is intended to provide investment managers with a way to effectively cross-border market their performance in a fair and competitive manner.
GIPS is also intended to benefit investment managers by providing a level playing field for marketing their performance history using an ethical, standard and consistent method. Investors benefit by having a higher degree of confidence in the numbers and the ability to make a direct comparison of all investment managers regardless of their location.
A Survey carried out by PricewaterhouseCoopers in the US in 1999 reveals that 75% of the respondents claimed full compliance in 1998. No respondents indicated that they do not plan to become compliant in the future. Likewise, a survey carried out by PricewaterhouseCoopers in Europe recently reveals that 74% of the respondents claimed compliance in 1999 and only 1% of the respondents indicated that they do not plan to become compliant in the future. The fact is, with increasing competition in the investment management industry and better awareness and better-educated investors, the investment community is fast realising the need for more reliable information.
In these countries compliance is no longer seen as an advantage over competitors, rather not complying is seen as a disadvantage.
To fund managers, compelling reasons for complying with a recognised standard include that it:
- Creates a fairer competitive environment
- Provides an advantage with consultants
- Provides an advantage with clients
- Provides good internal control to management and investors
Furthermore, fund managers recognise the potential for greater penetration of foreign markets where the standards are widely adopted. For example, the US experience would tend to suggest that it may not win you work but it can be a factor in losing a mandate, for e.g. the State of Louisiana in the US insists that public pension monies be managed by AIMR-compliant managers.
How critical is compliance with a recognised performance standard in Asia Pacific? Performance presentation standards are not new in the region. A similar standard already exists in Japan, known as Japan Investment Performance Standard (JIPS). There is no doubt that there is increasing pressure for firms in Hong Kong and other Asia Pacific countries to follow suit, especially as continued growth in the investment management industry is anticipated in Asia Pacific.
With the introduction of mandatory provident fund (MPF) contributions in Hong Kong starting from 1 December 2000, fund managers expect funds under management to grow by HK$30 billion a year. Approved MPF service providers have been busy selling their MPF plans since early this year, each of them hoping to capture a sizeable share of the market. Employers and employees are facing a very difficult task – which MPF service provider to choose? This choice will not be an easy one, especially since there are currently 20 approved MPF service providers, each of them with a proven track record.
A survey carried out by Hewitt Associates in early 2000 reveals that companies attribute a 67% weighting to the importance of historical investment performance in selecting an MPF service provider. If historical investment performance is such a deciding factor in selecting a pension service provider, one should not be too surprised for the requirements for more reliable data to also evolve and clients and regulators to request more reliable data in the very near future.
Who knows … it may not be too far away until the State of Louisiana’s experience takes effect in the Hong Kong pension market. After all, the requirement for consistent and reliable data is also about protecting investors’ interest and avoiding fund managers cherry picking data when presenting their performance to clients and consultants.
Compliance with a recognised standard is not an easy task. Many firms experience difficulties in achieving compliance at the initial stage. Many underestimate the extent of the task involved in becoming compliant. For example, GIPS requires a five year (or since-inception) record to be presented (compared to a 10 year record under AIMR-PPS) and consistent historical data may not be readily available for some firms. It is very important to allow time to understand the requirements and to prepare for the information gathering.
Change and evolution is inevitable in the industry … the question now is do we want to be a leader or a follower in this transformation process?
Marie-Anne Kong is senior manager, Investment Management Group, PricewaterhouseCoopers. Email: [email protected]
Mark J O’Sullivan is partner, Asian Investment Management Industry Group, PricewaterhouseCoopers. Email: [email protected]
