Actions speak louder than words
In these times of crisis, ethical standards have gained ground. Investors’ interests have to come first, says Jonathan A. Boersma, speaker at a local Luxembourg CFA Society conference. The Luxembourg CFA Society has become the official GIPS (Global Investment Performance Standards) Country Sponsor. In an interview with LFF, Mr. Boersma, Executive Director of GIPS at CFA Institute, speaks about restoring confidence, free markets and the Occupy movements.
Could you please define the GIPS standards?
GIPS are the global investment performance standards. These are ethical standards for how investment managers should calculate and present their investment performance. Some of the practices in the past were unethical: they included playing games with how the returns were actually calculated.
People would use inappropriate benchmarks - perhaps they would compare a total return for their product with a price-only return for the benchmark, which cannot really be compared. Or they might choose specific time periods in which their product had performed well but did not account for long term performance.
The standards are global, but they are voluntary. Through what means can they pressure managers and companies to comply?
I believe in free markets and the power of supply and demand. The demand side is the asset owners, the big pension plans, and the institutional investors. When they interview asset managers, they should require that they comply with the GIPS standards and if they don’t, they shouldn’t even consider the firm.
Also, on the asset managers’ side there is a sense of wanting to be considered as best practices managers. If I want to distinguish myself among other participants in the market, this is one way that I can do it. Investors want transparency; they want additional assurance of the substance of a firm.
With the GIPS standards there is an understanding of the internal controls and procedures that are necessary to claim compliance. Those are things that give comfort to investors.
What could be reasons not to comply?
One reason we often heard was cost. We don’t charge anything, the voluntary standards are out there for anybody to use. Most asset managers probably have the infrastructure to be compliant - if they don’t, then investors really need to take a careful look as to why they don’t.
What’s more, in the world of mutual funds, retail investors don’t know about the GIPS standards, so they don’t demand compliance. Besides, in other asset classes like private equity or real estate there has been a lower compliance rate historically.
Originally, the standards were designed for more traditional asset classes. How do they fit into alternative asset classes?
We have separate sections for real estate and private equity that address the unique aspects of those asset classes. We are just about to release a final paper on applying those standards to alternative strategies and structures. For instance, there are unique challenges for hedge funds with side pockets or the master feeder structures. The GIPS standards can already be applied to those types of structures, but we are providing some guidance to make it a little clearer how they should be treated.
How hard is it to regain investors’ confidence at times like these, when the credibility of financial institutions and politics is at stake?
I think what investors need to see is not just talk, but actions. There is the old cliché that actions speak louder than words. They have to see that their interests are really coming first. There needs to be this notion of not just what is good for me or my firm, but what is good for the investors and the broader economic public. That is what is going to restore confidence.
We have seen all the news of these Occupy movements. They represent the feeling people have that their interests are not being looked out for. GIPS is a teeny tiny sliver of that, but it is a tangible way for asset managers to say, “Listen, we are going above and beyond what is required by the law because we think it is the right thing to do.”
If you have questions about the GIPS standards, feel free to contact Mrs Carolyn Linnevers, GIPS Chairperson, Luxembourg CFA society.
The GIPS standards are about fairness; transparency and really providing investors with comparable information so that they can make informed decisions for themselves. CW