j.p. morgan analytics lab · gips compliance global investment performance standards (“gips”)...

J.P. Morgan Analytics Lab

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Speakers

David Spaulding, CIPM President The Spaulding Group

Karl Mergenthaler, CFA Executive Director J.P. Morgan

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Introduction

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Our goal is to engage in a constructive dialogue with clients, specifically as it relates to performance measurement, analytics, risk measurement and compliance monitoring of institutional portfolios.

We would like to bring to bear the research and thought leadership of our key partners, including The Spaulding Group.

Today’s conversation will focus on Global Investment Performance Standards for Assets Owners.

Featured Presentation: “GIPS for Asset Owners” with David Spaulding of the Spaulding Group.

We will address questions at the end of this presentation. Please send an questions to: [email protected]

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Investment Information Services Overview

We recognise that every client is different and has unique requirements

We develop analytical solutions across the full investment spectrum

We deliver a state-of-the-art, fully flexible on-line reporting tool

We stay at the forefront of the investment analytics and compliance reporting industry

Introduction

Over 400 clients around the world with over 10,000 portfolios and $3 trillion in assets under measurement

Corporate and public pensions Asset managers Endowments and foundations Insurance companies Central banks and sovereign wealth funds Corporate and public treasuries Hedge funds

Client profile

We provide performance analytics, risk analytics, and compliance reporting services

Our mission to provide a best-in-class, fully integrated suite of data and analytics services.

Philosophy of our group

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Integrated Data

Strategy

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Presenter

Presentation Notes

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A Globalized World for Investors

Regulation:

U.S. – Dodd-Frank, ERISA

EU – EMIR, IORPs Directive (Solvency II)

Australia – Stronger Super

Must have the interests of the end-investor at its heart

Industry – pension funds, banks, asset managers, insurers – impact is substantial, e.g., Financial Transaction Tax

Restoration of trust in the financial industry

Demography:

Populations aging dramatically, particularly in developed markets

Longevity challenges fiscal sustainability

Global era of uniquely low predictability

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Two key issues inform where we are today and indicate the shape of the future:

Impacts

Regulatory imperatives – governance, reporting and transparency

Aging populations – decreasing number of savers, increasing pension liabilities

Key fundamentals – Participation, Security and Adequacy

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Expected Returns – How Do You Get There From Here?

It may be challenging for pensions to meet expected return assumptions.

For corporate plans, expected return assumptions have declined from 9.2% in 1999 to 7.3% in 2012.

Many public plans have lowered their expected return assumptions recently.

Many corporate DB plans have implemented a Liability Driven Investing framework, and some have implemented pension buy-outs.

DB plans are increasing allocations to developed and emerging market equities, as well as alternatives such as hedge funds.

Expected Return

Typical LDI

Allocation

Typical Public Plan Allocation

Total Equity

Domestic 7.0 – 9.0 % 22.0% 30.0%

Int'l - Developed 6.0 – 8.0% 14.0% 20.0%

Int'l - Emerging 8.0 – 10.0% 2.0% 2.0%

Total Fixed Income

Core 2.0 – 4.0% 2.0% 18.0%

High Yield 6.0 – 8.0% 2.0% 4.0%

Long Duration 3.0 – 5.0% 34.0% 2.0%

TIPS 3.0 – 5.0% 2.0% 2.0%

Emerging Market Debt 6.0 – 8.0% 2.0% 2.0%

Real Estate

Public & Private 7.0 - 9.0% 5.0% 5.0%

Alternative

Hedge Funds 6.0 – 8.0% 3.0% 3.0%

Private Equity 7.0 – 9.0% 7.0% 7.0%

Real Assets (incl Commodities) 6.0 – 8.0% 2.0% 2.0%

Other Opportunistic 6.0 – 8.0% 2.0% 2.0%

Cash / Cash Equivalents 2.0 – 3.0% 1.0% 1.0%

Weighted Average Expected Return ~ 6.5% ~ 7.0%

Median Expected Return Assumption 7.4% 8.0% Source: J.P. Morgan estimates, Standard & Poor’s, NASRA, Company information.

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Evaluates and compares the absolute and relative return of accounts and composites against each other and industry, custom, or blended benchmarks

Available daily, monthly or quarterly. We provide daily performance on US $700 billion in assets

Full reporting of derivatives and alternative investments, including real estate and private equity

Overview

Provided at asset class, sector, country, currency, and individual security level for any time period

Access to several classification schemes, including GICS or ICB for equity, Barclays for fixed income, and our own proprietary scheme for all other securities

Web-based reporting via J.P. Morgan ACCESS

Flexibility of access to data and reporting – can view, group, dissect and report the underlying data any way clients choose

Powerful template builder that creates, edits, copies, stores and publishes reports based upon custom selection criteria

Hard copy reports can be tailored to meet client requirements of format and content

Board Reporting available

Performance Measurement

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Robust drill-down capabilities

Flexible, board-quality reporting

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Performance Measurement

Comprehensive and automated web-based accounting and performance reconciliation with investment managers to ensure accurate client reporting

Portfolio performance can be compared to our existing database of over 3,500 published indices

Customized benchmarks can also be created to meet client-specific requirements

Top-tier partnerships with Barclays Capital, MSCI, Russell and other data suppliers

Daily time-weighted (with daily accounting information)

Flexible, client-defined cash flow timeline (beginning, middle, or end of day)

Modified Dietz

Risk statistics available over any period of time, including: information ratio, Sharpe ratio, tracking error, standard deviation, Sortino ratio, downside risk

Robust Quality Controls

Customized benchmarks

Multiple return calculation methodologies available

Multiple ex-post risk statistics available

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Key Trends

Clients want to analyze and monitor their entire portfolio, with timely access to performance, risk, and compliance data.

Key trends include:

Frequency

Daily performance measurement and analytics

We provide daily performance measurement to clients with approximately $700 billion in assets

Transparency

Security level detail

Look-through capabilities for commingled finds

Hedge funds and other alternatives may provide challenges

Customization

Custom and blended benchmarks (Example: 25% Barclays Capital Long Govt / 75% Barclays Capital Long Credit)

Access

Ability to interrogate data

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GIPS Compliance

Global Investment Performance Standards (“GIPS”) are universal, voluntary standards that are administered through the CFA Institute. The GIPS standards apply primarily to investment managers.

J.P. Morgan Investor Services is a custodian, and as such is not able to claim compliance with Global Investment Performance Standards.

The Guidance Statement on Recordkeeping Requirements indicates that-

Firm (e.g. asset owner) utilizing a third party (e.g. custodian, etc.) is responsible for its claim of compliance

Firm (e.g. asset owner) claiming compliance must ensure that the record and information provided meet the requirements of the GIPS standards

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Conclusions J.

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We recognize that clients face a multitude of challenges, including regulatory and other reporting requirements. In recent years, many institutional investors have sought guidance on best practices related to performance and risk measurement, as well as compliance monitoring.

The CFA Institute has issued an Exposure Draft on GIPS for Asset Owners. Several clients have made inquiries related to this initiative.

J.P. Morgan’s Investment Information Services group would like to continue working with clients to provide the data, tools, analysis, and insights in order to make informed decisions.

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This presentation was prepared exclusively for the benefit and internal use of the J.P. Morgan client to whom it is directly addressed and delivered (including such client’s subsidiaries, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. Neither this presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of J.P. Morgan.

The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. J.P. Morgan’s opinions and estimates constitute J.P. Morgan’s judgment and should be regarded as indicative, preliminary and for illustrative purposes only. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any other entity. J.P. Morgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects.

J.P. Morgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities Inc., J.P. Morgan plc, J.P. Morgan Securities Ltd. and the appropriately licensed subsidiaries of JPMorgan Chase & Co. in Asia-Pacific, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank, N.A. J.P. Morgan deal team members may be employees of any of the foregoing entities.

This presentation does not constitute a commitment by any J.P. Morgan entity to underwrite, subscribe for or place any securities or to extend or arrange credit or to provide any other services.

Copyright © 2013 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. FDIC.

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GIPS Compliance & Asset Owners

November 13, 2013 JP Morgan Webinar

David Spaulding, CIPM

What we’ll discuss A brief background on the Global

Investment Performance Standards (GIPS®) The recently published Guidance Statement

GIPS broadening to include asset owners The basis for it Why asset owners should consider compliance

Your questions

11/13/2013 (c) Copyright 2013 The Spaulding Group, Inc. Page 13

Briefly, what is GIPS? The Global Investment Performance

Standards It provides a format for managers of OPM

(other people’s money) to present past performance to prospective clients

GIPS promotes “Best practice” Full Disclosure Ethical Principles


GIPS Ownership / Oversight The GIPS Standards are technically

“owned” by the CFA Institute The Standards are administered by an

“Executive Committee” (EC), that consists of nine members

Guidance is provided by the “GIPS Council,” which consists of representatives from all 30+ countries that have endorsed the Standards


Some key concepts

By NO means is this a course on GIPS But, we’ll touch on a few of the “key

concepts” of the Standards


Some key concepts Firm Definition

Compliance is at the “firm” level However, a “FIRM” (i.e., the entity at the

broadest level) can define a firm(s) to be a smaller component; there is guidance as to how this can be accomplished

While there is flexibility, there are constraints, too


Some key concepts Composites

A composite is a collection of portfolios that have a similar investment strategy / objective

Allows for apples-to-apples comparisons E.g., prospect is looking for a U.S. Large Cap Growth manager; the manager presents performance for their U.S. Large Cap Growth portfolios

Presentations and returns are at the composite level

Guidance is available on this topic


Some key concepts Discretion

“All actual, fee paying, discretionary portfolios must be included in one composite”

Actual = a real portfolio (e.g., not a model) Fee paying = client pays an advisory fee Discretionary = probably not what you think

Discretion for GIPS is not “legal” discretion; this is assumed; it deals with the ability of the portfolio to be “representative” of the strategy

Client restrictions may make a portfolio non-discretionary


Some key concepts Verification

Verification is a process by which an independent verifier assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Source: Global Investment Performance Standards, 2010. Page 45. <Emphasis added>


GIPS and Asset Owners

Can asset owners comply? Why should they want to?


As for “can” they? … The history is filled with confusion At one time, under the AIMR-PPS®, it was

pretty clear that they couldn’t! P&I, January 9, 2006: “Misleading Compliance” by

Brian C. Breidenbach, challenged the notion of compliance

P&I, February 20, 2006: “Misuse of AIMR-PPS,” by David Spaulding, challenged his level of angst regarding pension funds seeking to claim compliance


Think about this: How is an asset owner any different than a fund-

of-fund manager? Just like FoF managers, asset owners

Decide on strategies to invest in Pick managers (internal and/or external) Establish policies, including allocations across strategies

(managers)

And, fund-of-fund managers can comply One big difference: asset owners do not typically

offer their services to others 11/13/2013 (c) Copyright 2013 The Spaulding Group, Inc. Page 23

GIPS expansion to asset owners

A decision was made a few years ago to allow asset owners to comply*

A draft Guidance Statement** was released earlier this year for “plan sponsors”

Over 30 firms and institutions commented seeing evidence that this may be catching on!

* See: www.gipsstandards.org/resources/Documents/gips_outreach_brochure_hi_res.pdf ** Copies are available





Over 30 firms and institutions commented seeing evidence that this may be catching on!

* See: www.gipsstandards.org/resources/Documents/gips_outreach_brochure_hi_res.pdf ** Copies are available


It’s interesting to consider WHO commented

ACA Verification Services, LLC API Asset Performance Inc. Asociación Española de Presentación de

Resultados de Gestión Association of Investment Management

Companies Association for Savings and Investment, South

Africa BNY Mellon Asset Servicing CalPERS Investments Canadian Investment Performance Council CFA Society of New Zealand CFA Society of Philippines Deloitte & Touche LLP Financial Services Council German Asset Management Standards

Committee The Hong Kong Society of Financial Analysts Investment Management Association of

Singapore

Liechtenstein Bankers Association The Norwegian Society of Financial Analysts New York State Teachers' Retirement System Paul Schrader PricewaterhouseCoopers LLP, London Procapitales The Security Analysts Association of Japan The Spaulding Group State Street IMS Performance & Analytics

Group State Street Investment Analytics Swedish Society of Financial Analysts Swiss Bankers Association Towers Watson Investment Services, Inc. UniSuper Management Pty. Ltd. United Kingdom Investment Performance

Committee (UKIPC) United States Investment Performance

Committee (USIPC) Wilshire Consulting

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Mainly societies (18) ACA Verification Services, LLC API Asset Performance Inc. Asociación Española de Presentación de





Singapore





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A few consultants (4) ACA Verification Services, LLC API Asset Performance Inc. Asociación Española de Presentación de





Singapore





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A few verifiers (4) ACA Verification Services, LLC API Asset Performance Inc. Asociación Española de Presentación de





Singapore





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But very few asset owners (3) ACA Verification Services, LLC API Asset Performance Inc. Asociación Española de Presentación de





Singapore





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Societies 18Consultants 4Verifiers 4Asset Owners 3Other 3Total 32




Over 30 firms and institutions commented But despite this, we are seeing evidence

that this may be catching on! * See: www.gipsstandards.org/resources/Documents/gips_outreach_brochure_hi_res.pdf ** Copies are available


Typical (?) Asset Owner / Manager Relationship

Compliance is a de facto requirement

Compliance being recommended

WIIFM What’s In It

For Me?

Why would an asset owner want to comply with GIPS?

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WIIFM What’s In It

For Me?

Why would an asset owner want to comply with GIPS?

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To adhere to “best practice”

Most institutions wish to abide by best practices, wherever they’re established.

For performance measurement and reporting, GIPS is recognized as best practice.

While parts of the Standards don’t apply to asset owners, those that do should be followed.

They are ethical principles that promote full disclosure and enhanced transparency.

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To enhance confidence and credibility

All asset owners answer to stakeholders who want confidence in what is being presented, just as those who prepare the numbers.

By adhering to a globally accepted standard, the institution’s reports will provide increased credibility with what is presented.

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To create better controls

GIPS requires written policies and procedures. While many institutions have policies and procedures, they are often not written down, which can be problematic.

Such a document forces the institution to think about how they calculate and report performance, and the controls they have in place.

It is a way to ensure consistent application of rules. This documentation is also helpful in the event of the

departure of the individuals responsible for this area, to ensure consistency going forward.

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For comparability

Asset owners often want to compare how they’re doing with others plans.

With no consistent method to calculate and present returns, this can be difficult; however, as more institutions adopt the Standards, comparisons will be much easier to accomplish.

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From the guidance: (1/3)

A voluntary commitment to follow global industry standards with respect to performance calculation and presentation practices, based on the principles of fair representation and full disclosure.

The willingness to follow best practices with respect to the valuation of the plan’s investments.



The establishment of robust policies and procedures in the area of investment performance measurement.

That the asset owner is making investment decisions and monitoring the overall plan assets on the basis of accurate investment performance processes.



That both the calculation and presentation of investment performance have been done on a consistent, transparent, and comparable basis.

The willingness to adopt the same set of performance standards that are generally required of any external investment managers that it retains.”


Do all aspects of GIPS apply? No. For example:

Fee schedule is n/a The concept of “non-discretionary” accounts doesn’t

apply, either

The “firm” is the “institution” that oversees the plan(s); that has discretion and autonomy over the assets being managed

No prospects, so who gets presentations? Those with oversight responsibility for the total fund

assets (c) Copyright 2013 The Spaulding Group, Inc. Page 42

Anything new?

For asset owners, the Standards recommend reporting the internal rate of return (IRR; money-weighted return)

And, if you’re going to show MWRR, perhaps two benchmarks are needed


How many composites?

Expect there to be at least one per plan If two or more plans are managed identically (which is unlikely), then you’d have these plans in the same composite

Why not one per individual portfolio (strategy)?

What about by asset class?


A “road map” to compliance


A challenge to comply

You have to understand the Standards Common practice has been to ask potential

managers if they comply No real requirement to know much about the Standards

Now, the askers may choose to comply Which will require more knowledge


But how difficult will it be? Not very!

Composite construction In most cases, one account / composite

Return of the composite = plan return Unlikely that a “composite system” will be needed

The “big” question: are the returns compliant

Policies & Procedures Much simpler than an asset manager’s


Status?

As with all new guidance statements, the one for asset owners was published for public comment (“exposure draft”)

The comment period ended August 1, 2013 Anticipate the final version to be released in

early 2014 Plan was for effective date January 1; most

likely will shift a bit. 11/13/2013 (c) Copyright 2013 The Spaulding Group, Inc. Page 49

Resources

Guidance Statement: copies available on line:

http://www.gipsstandards.org/standards/guidance/Documents/Comments/exposure_draft_public_comment_plan_sponsor_gs.pdf Or just: http://tinyurl.com/kopu4ls


Resources GIPS Standards http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2010.n5.1; Or simply: tinyurl.com/m3tz8x8 GIPS Handbook http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2012.n4.full; or http://tinyurl.com/lzbb32m


Resources TSG’s Guide to the Performance

Presentation Standards “The GIPS Standards & Asset Owners”

white paper


Questions? David Spaulding, CIPM The Spaulding Group, Inc. [email protected]

www.linkedin.com/in/DavidDSpaulding www.SpauldingGrp.com

InvestmentPerformanceGuy.blogspot.com http://twitter.com/#!/SpauldingGroup

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Questions? Please email to:

[email protected]

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