investment performance standards: a time of transition * 7

Investment Performance Standards: A time of transition *7 September 2005

*connectedthinking ��

Agenda

The Current Position

Revised GIPS : Major Changes

Demand for Comparability

7 September 2005Page 2Investment Performance Standards: A Time of Transition

PricewaterhouseCoopers




Where are we now?

• First released in 1999

• Responsibility for GIPS now rests with the CFA Centre for Financial Market Integrity – Investment Performance Standards Policy Group

• Continuous improvement through interpretations and guidance statements over the past few years




Why measure performance?

“If it ain’t measured, it ain’t managed”

• Process creates control

• To understand risks

• To see if managers are achieving objectives

• To see if fund is achieving objectives

23 September 2004Page 4Embracing GIPS : Getting a bang for your buck





Embracing the Standards

• Recognised by investment management firms, investors and consultants as providing increased comfort on the calculation and presentation of investment performance results

• Applicable to traditional asset management, hedge funds, private equity and real estate firms

• The growing number of countries adopting GIPS means investors are better able to compare GIPS compliant firms globally




Adoption on GIPS continues to grow on a global scale

AustraliaCanadaEgypt *Ireland

ItalyJapan

South AfricaSwitzerland

United KingdomUnited States

AustriaDenmarkFrance

HungaryNetherlands

NorwayPolandSpain

BelgiumGermany

Hong KongLuxembourgNew Zealand

PortugalSingaporeSweden

Country Versionof GIPS

Translationof GIPSGIPS

* Indicates submission has been received, but not yet endorsed by the IPC






So why change?…..Objectives behind the GIPS revisions


Incorporate existing technical guidance and provisions in a single

document

Recommend upgrade of current GIPS “recommendations” to

“requirements”

Introduce new provisions based on local best practices to improve on

existing GIPS standards

Eliminate the need for separate standards in various countries



Moving forward

• Revised GIPS released in February 2005

• Will replace existing local country versions of GIPS effective 1 January 2006

• However, country-specific differences to GIPS arising from local regulatory demands may still require retaining a country version of GIPS

• IMAS is now officially recognised by the CFA Institute as the country sponsor for GIPS in Singapore




How will the changes impact on your business?


Marketingand client

communications

Complianceand risk

management

IT and operational procedures

Human capital competency



Fundamentals of compliance : A snapshot

• A challenging but rewarding experience

• Key requirements to consider when claiming compliance:

− Defining the firm− Document policies and procedures− Input data− Calculation and methodology− Composite construction− Disclosures, presentation and reporting

• Must be viewed as a firm-wide project, not just the performance team’s




An Overview


Interaction with prospective clients

Historical performance track record

Accounting conventions

Disclosures

Carve-outs

Verification

Internal compliance documentation

Definition of the firm

Performance calculations

Portfolio valuation

Dispersion



Interaction with prospective clients

• Includes a number of important clarifications relating to the provision of GIPS compliant information to prospective clients:

Must make every reasonable effort to provide a compliant presentation to all prospective clients, i.e. firms cannot choose to whom they want to present compliant performance

Must provide a list and description of composites to any prospective client and provide a compliant performance presentation to all prospective clients upon request for any of the firm’s composites




Interaction with prospective clients (cont’d)

• Can show to prospective clients any other supplemental information in addition to a GIPS compliant composite report

• Applies to prospective clients only and does NOT necessarily extend out to other third parties

• New recommendation � firms should not market a composite to a prospective client whose portfolio assets will be less than the minimum asset level




Internal compliance documentation

• Must document, in writing, policies and procedures used in establishing and maintaining GIPS compliance

� includes GIPS manual, GIPS compliance control plans etc




Historical performance track record

• Convergence of local standards to GIPS does not mean the elimination of previously reported CVG-compliant periods

• Firms previously compliant with a CVG must continue to show their historical performance, building up to ten years, or since inception

• Requirement � show five years of compliant track record building to ten years




Definition of the Firm

• No longer permitted only as:

an entity registered with the appropriate national regulatory authority over-seeing the entity’s investment management activities,

all assets managed to one or more base currencies

• Can now only be defined as an investment firm, subsidiary, or division held out to clients or potential clients as a distinct business entity




Definition of the Firm (cont’d)

• Possible criteria that can be used to determine this includes:

- being a legal entity

- having a distinct market or client type (eg. institutional, retail, private client, etc)

- using a separate and distinct investment process

Key to defining a firm is how it is marketed and held out to theinvesting public




Accounting conventions

• Requirement to apply accrual accounting for dividends (as of ex-dividend date) from 1 January 2005 has been downgraded to a recommendation

• Clarification of trade-date accounting principle has been clarified




Performance calculations

• Must value portfolios (ie calculate portfolio performance) on the date of all large external cash flows starting from 1 January 2010

• Appears to be a trade-off for the desired introduction of the True Time-Weighted Rate of Return method (TWR) and the reality of investment managers being able to achieve this aim

• Likely to be use for daily valuations due to IT systems limitations, defining what is “large”? etc




Disclosures

• Must disclose general information regarding the investment objectives and strategy of the composite

• If a composite has been redefined, the date and nature of the change must be disclosed. Changes to composites are not permitted to be applied retroactively

• Must disclose that a description of calculation methods and valuation sources (for portfolios, composites and benchmarks) are available upon request




Disclosures (cont’d)

• Must disclose a standard management fee schedule appropriate to the composite presentation

• For fund-of-funds (FOF) structures with multiple levels of fees, only the fee schedule of the fund-of-funds manager must be disclosed, not those of the underlying funds





• Can now choose to disclose either the total firm assets or the percentage of the composite assets in the total firm assets in the composite reports

• Where the composite contains < 5 portfolios, disclosure of exact number of portfolios is no longer required. A footnote can suffice indicating for this particular year, number of portfolios in composite was less than 5





• If there is discretion over the selection of the sub-advisor, the firm must claim the sub-advisor’s performance as part of its performance history and include the assets in the firm’s total assets

• Requirement to disclose the percentage of the composites invested in countries or regions not included in the benchmark has been abandoned

• Additional new disclosures regarding bundled fees have been incorporated into the revised GIPS from the GIPS Fees Provisions




Portfolio valuation

• New requirement is that for periods beginning 1 January 2010, firms must value portfolios as of the calendar month-end or the last business day of the month

This has repercussions for accounts/mandates such as the structured, guaranteed or protected funds which are traded on specific calendar days only




Carve-outs

• Key requirement for carve-outs to be managed with their own cash positions has been moved from 1 January 2005 to 1 January 2010

• Agreement for revision of date is due to the acknowledgement by the IPC that this would be overly burdensome for firms to implement prior to 2010




Dispersion

• If composite contains less than 5 portfolios for the full year, presentation of an annual measure of dispersion is not required

• Must disclose which dispersion measure is presented




Verification

• Independent verification by a third party from 2010 is a recommendation only, however it is strongly encouraged

• Requirement of independent verification is expected to become mandatory at a future date




Other recent developments : IPC

• IPC will be changed to the “GIPS Executive Committee”

• Establishment of a “GIPS Council” forum for all Country Sponsors to comment and voice out on GIPS

• Establishment of Asian Regional Investment Performance Sub-Committee (Asian RIPS)




Other recent developments : Certificate in Global Investment Performance Standards (CGIPS)

• To be introduced in early 2006

• Independent of the CFA Program

• TWO sequential levels of examination – ‘Principles’ and ‘Expert’, computer based and 3 hours in duration

• CGIPS designation




Current investment industry landscape


Competing for investors’money in different markets

Homo-genouscommodity

Manufacturers versus distributors

Fight for shelf space

Growth coming from overseas market into the Asia region



Current investment industry landscape (cont’d)

• Singapore and Hong Kong have both been officially endorsed as GIPS sponsors in 2005


How to differentiate?

How to compete with otherglobal players?



In Singapore, close to half of the respondents are already in compliance, and another 35% are in the process of getting into compliance, or intend to within the near future

10% 20% 30% 40% 50%

No intention tobecome compliant

Intend to becomecompliant in near

future

Currently workingtowards compliance

In full compliance withAIMR PPS or GIPS

Source : IMAS Survey 2004

45%




The scene in Hong Kong appears much more advanced in terms of compliance ……….

• Firms responding were nearly all compliant – but are they really?

• Global firm or regional office compliance does not equate to compliance for the Hong Kong office

• Not compliant but intend to sometime after 2006

94%

6%

Yes No


Source : HKIFA Survey 2005



In both Singapore and Hong Kong, compliance is viewed by the majority in as being a competitive advantage

22%

78%

Yes No


Compliance with GIPS is a Competitive Advantage

25%

75%

Yes No

Singapore Hong Kong



Why is that so?


SINGAPORE

Important for global marketing, especially in US and Europe

Enhances credibility and image

Demonstrates good internal controls and conformance to global standards

HONG KONG

Provides more confidence to clients and investors

Better reputation – ethical

Industry best practice

Commitment to the highest international standards



Where to from here?

• Survey results in both Singapore and Hong Kong indicate a positive attitude

• Direction of respondents is encouraging ….. most clearly view compliance as a competitive advantage

• Verification of compliance is a desirable process

• Regional focus and sponsors working together to promote GIPS across Asia




Questions?



Justin OngPartner, Leader – Wealth Management PracticePricewaterhouseCoopers SingaporeTel. (65) 6236 3708E-mail [email protected]

Jerome ChungSenior Manager, Investment Management Industry GroupPricewaterhouseCoopers Hong KongTel. (852) 2289 2289E-mail [email protected]

ContactsInvestment Performance Measurement Services

www.pwc.com

© 2004 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers. � ��



Guidance Statements and incorporation in the revised GIPS

In general, remains a separate Guidance Statement and source for further details. Partially incorporated in section “Fundamentals of Compliance” in the Revised GIPS

Guidance Statement on Definition of the FirmStatus: adopted

Remains a separate Guidance Statement. In the Revised GIPS this topic is also briefly dealt with in paragraph 3.B.2

Guidance Statement on the Treatment of Significant Cash FlowsStatus: adopted

Accommodated under paragraphs 19 and 22Guidance Statement on GIPS Paragraph 21Status: adopted

Accommodated under 5.A.4. (in a modified form). The Guidance Statement remains valid as a source of further details

Guidance Statement on Performance Record PortabilityStatus : adopted

Status under the Revised GIPSGuideline

Major changes brought by the revised GIPS standards




Generally incorporated within the Revised GIPS in sections 2, 4 and 5. The Guidance Statement remains valid as a source of further details

GIPS Fees ProvisionsStatus: adopted

Incorporated in section 7 “Private Equity” and Appendix D “Private Equity Valuation Principles in the Revised GIPS

GIPS Private Equity ProvisionsStatus: adopted

Incorporated in section 6 “Real Estate” in the Revised GIPS

GIPS Real Estate ProvisionsStatus: adopted

Remains a separate Guidance StatementGuidance for VerificationStatus: adopted

In general, remains a separate Guidance Statement and source for further details. Partially incorporated in section 3 “Composite Construction” in the Revised GIPS

Guidance Statement on Composite DefinitionStatus: adopted






Will complement the GIPS framework as a separate Guidance Statement

Guidance Statement on the Use of Leverage and DerivativesStatus: comment phase closed

The provisions are incorporated within the Revised GIPS in sections 3-5. The Guidance Statement remains valid as a source of further details

Guidance Statement on the Use of Carve-OutsStatus: adopted

The provisions are incorporated within the Revised GIPS in section 2. The Guidance Statement remains valid as a source of further details

Guidance Statement on Calculation MethodologyStatus: adopted

Remains a separate Guidance StatementGuidance Statement on the Use of Supplemental InformationStatus: adopted

Incorporate in Appendix C “GIPS Advertising Guidelines” in the Revised GIPS

GIPS Advertising GuidelinesStatus: adopted







Guidance Statement on Verifier IndependenceStatus: comment phase closed


Guidance Statement on Error CorrectionStatus: comment phase closed


Guidance Statement on Portfolio Recordkeeping RequirementsStatus: comment phase closed


Guidance Statement on Wrap Fee / Separately Managed Account (SMA) PerformanceStatus: comment phase closed



investment performance standards: a time of transition * 7

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