« Can YOU simplify investment commentary better than this? | Main | When Fear of Bonds Exceeds Fear of Stocks »

07/21/2015

Going Beyond GIPS


Click to Print This Page

GIPSGlobal Investment Performance 
Standards, better known as GIPS, are a 
voluntary set of standards established to
 create transparency in the calculation and
 presentation of performance. From 
improving the credibility of compliant investment firms to providing clients the ability to fairly evaluate the performance of these firms, GIPS has arguably become the gold standard in investment performance. As client awareness has risen, demand for GIPS is pushing investment firms in becoming compliant in order to maintain their competitiveness. While this is a positive in an industry that sorely needs standards that encourage fairness and credibility, it would be short sighted for firms to stop at GIPS when it comes to their performance. We must remember that performance is not a part of GIPS but rather it is GIPS that is a part of performance. Meaning that, in the ever-growing field of investment performance, stopping at GIPS would rob a firm of maximizing the benefits of performance that go beyond GIPS.

Performance Is More than GIPS

The Global Investment Performance Standards are standardizing performance reporting and bringing a greater level of transparency to investment firms’ greatest marketing tool, performance. GIPS have become a business in and unto itself with practitioners ranging from the large accounting and consulting firms to individual GIPS specialists. The current focus on compliance is important and should be encouraged but what is sorely lacking is a move towards establishing performance analysis as a key factor in evaluating the effectiveness of strategies, managers and firms alike.

Establishing performance teams dedicated to analyzing the performance of the firm, its strategies and its managers is the highest level of quality an investment firm can attain in this field. Distancing oneself from the short-sighted view of performance as only an operational function with the sole tasks of administrating the systems, reporting, and GIPS related functions is the kind of mindset that is required to turn performance from a cost center to a profit generator. Allowing all performance feedback to come from the portfolio managers and CIOs, whose independence and performance knowledge is sorely lacking, will cost firms the opportunity to improve on inefficiencies that only an objective performance specialist can provide. Performance has progressed exponentially over the past 20 years such that portfolio managers and CIOs lack the time and expertise to properly and effectively analyze performance.

A Lesson from the Sports World

A good analogy of the state of performance in many firms is professional team sports. Whether it is baseball, football, soccer or my beloved hockey, at one time there was either one or a couple of coaches involved in managing a team. In hockey for example, the sole responsibility for evaluating the team’s strategy and player performance belonged to the head coach. Considering that the strategy was his design and that his viewpoint of the game was limited to standing behind the bench, most of the available information to maximize feedback was not being processed nor analyzed. As competition increased and new tools were developed, that old mindset quickly disappeared. The game evolved to where it now employs assistant coaches (position specific), video analysts, specialized trainers, and sports psychologists. Each person has the responsibility of gathering as much information as possible and providing the analysis/feedback that the head coach can use to effectively evaluate his strategy and players. Investment firms have not been as quick to adopt such an approach with respect to performance and are lagging considerably to maximizing the benefits that this field has to offer.

Final Words

As an investor and a professional, I find the progression of GIPS as a major step towards improving the performance functions in the investment industry. This progression should not stop at GIPS and investment firms worldwide have far more to gain by taking performance from an operational task to an analytical one, where it transitions from a cost center to profit generator. Effective evaluation of strategies and managers provides the invaluable feedback that is key to facilitating firms in outperforming. If specialization had no value, then the game of hockey would still have a fedora wearing coach solitarily standing behind a bench.

-Ioannis Segounis, Founder and Managing Director of Phocion Investments, founded the firm in 2010 with the goal of influencing the investment industry to adopt best practices. Ioannis earned a Bachelors degree in Engineering from Concordia University and an MBA from HEC Montréal. He also earned the CFA and CIPM designations from the CFA Institute. 

Related Posts Plugin for WordPress, Blogger...

Comments

The comments to this entry are closed.

UConn-ad

NYSSA Job Center Search Results

To sign up for the jobs feed, click here.


UPCOMING EVENT
MF16

NYSSA Market Forecast™: Investing In Turbulent Times
January 7, 2016

Join NYSSA to enjoy free member events and other benefits. You don't need to be a CFA charterholder to join!


CFA® EXAM PREP

CFA® Level I 4-Day Boot Camp
Midtown

Thursday November 12, 2015
Instructor: O. Nathan Ronen, CFA

CFA® Level II Weekly Review - Session A Monday
Midtown

Monday January 11, 2016
Instructor: O. Nathan Ronen, CFA

CFA® Level III Weekly Review - Session A Wednesday
Midtown

Wednesday January 13, 2016
Instructor: O. Nathan Ronen, CFA

CFA® Level III Weekly Review - Session B Thursday
Thursday January 21, 2016
Instructor: O. Nathan Ronen, CFA

CFA® Level II Weekly Review - Session B Tuesday
Thursday January 26, 2016
Instructor: O. Nathan Ronen, CFA