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Performance Presentation Standards
August 2, 1990
The Association for Investment Management and Research (AIMR), the Financial Analysts Federation (FAF), and the Institute of Chartered Financial Analysts (ICFA) have all endorsed the following Standardsfor investment management performance presentation. Until now, this all important subject has been given insufficient attention; as a result, investment advisors (despite regulation by the SEC) have been left to follow their own standards, which have been varied, uneven, and, in some instances, irrsponsible and dishonest. If the investing public is to be treated fairly, and if the investment management industy is to reprosent the highest ethical and moral standards, a fair and understandable policy should be followed. The Standards, have been endorsed by the AIMR Board of Govenors after consideration of comments from its membership (which includes investment advisors, borkers, consultants, academicians, and other interested parties).
The overall philosophy underlying these Standards is the need for full disclosure of investment performance data to clients and client prospects. Certain statistics and presentation data have been delineated as requirements, but the main theme is that investment managers may present any reasonable statics provided that their derivation, and particularly any exclusions therefrom, are highlighted and made abundantly clear.
Parties affected by these Standards.
These Standards are directed to " investment managers," including all registered investment advisors, but the Standards also apply to other organizations and individuals, such as:
Stockbrokers acting as "portfolio managers" for clients, particularly those who charge separate(from normal commissions) fees for their management services.
Mutual funds, where certain regulatory presentation practices can be deceptive ( but which exist under different jurisdictions).
Consultants, where it is recommended that similar standards be set by a separate AIMR committee.
While clients and client prospects are encouraged to make entensive qualitative judgments of investment managers, these AIMR guidelines concentrate on the quantitative--on a complete, accurate, and fair presentation of investment performance data.
Time-weighted performance calculation is the mandatory methodology because it represents the only practical method of comparing manager results over time.
Total return, including income and capital appreciaton, is also mandatory.
To allow for the most productive judgment of manager efficiency and client investment returns, results should be presented before fees so long as the manager's fee schedule is included whith performance presentation. The SEC staff accepts this format in " one-on-one" presentation, defined by the SEC staff as manager disclosure(s) to any one clinet or prospect group entrusted to consider manager selection and retention. Communications by manager(s) can, therefore, be made to multiple represenatitives of a given account. Any written performance disclosure materials distributed ot more thatn one client or prospect, in other than one-on-one presentations, must present performance results after deduction of management fees. The SEC staff has ruled that deduction of such fees may be calculated on an actual or modeled basis for historical performance, but that for performance periods after May 27, 1990, actual (not modeled) management fees must be deducted. Managers should review the SEC pronouncements on performance advertising to determine their applicability and presentations are required by these pronouncements.
Managers and new clients should agree in advance on the starting date for performance calculation
This starting date should be part of the Management Agreement, and calculations should conrform to the agreed-to date.
Because the precie starting date for managed funds is not always definite (due to legal problems, delay of receipt of funds, etc.), it is recommended that a specified period (e.g., 30 days after funds have become available for investment) be set as inception for performance calculation. Again, the time period will vary from manager to manager, dependent on manager style or client preference, but agreement in ;advance between manager and new client eliminates potential confusion and sets a consistent standard.
Portfolios should be valued at least quarterly. Monthly valuation (and linking) is the preferred frequency where practical.
A time-weighted return formula that minimizes the effect of contributions and withdrawals must be utilized. Daily accounting for contributions and withdrawals is the preferred method.
When a contribution (or withdrawal) is significant (e.g. over 10 percent) in relation to the latest calculation of market value, a protfolio is best revalued on the date of the contribution (or withdrawal) to reduce possible distortion.
Investment income should be included on a full accrual basis (as opposed to cash basis).
Performance results for any one asset class (such as equities) should include cash equivalents and any other securities (e.g. convertivle securities in an equity portfolio) held by the manager in place of that asset.
If managers present performance results for any particular asset class excluding cash or other securities used by the manager in place of the asset class, performance with cash and other securites should likewise be presented along with a statment that results so presented conform to AIMR Standards.
Compound annualized performance returns should be presented for all periods covered in presentations.
Exclusions from account-performance calculations and presentations should be clearly stated.
Complete information on inclusions and exclusions of data should be presented, as per attached Tables 1 and 2.
Managers should provide the percentages fo their inclusions and exclusions to prospects. Thus, if the presented data constitute 85 percent of the asset class (e.g. equities) managed, with 15 percent excluded, this should be so stated. If the presented data constitute 50 percent of a particular type of investing within that asset class (e.g., small- to medium-capitalization equities), this should also be stated.
Examples fo such exclusions might include:
Special-category investments, such as assets not carrying full discretionary power within a manager's business in which other accoiunts are normally discretionary.
Client assets not being charged a fee, wighin a manager's business that is normally fee-based. As indicated throughout Section VIII, the performance of all fee-based accounts should be accounted for in manager measurement and presentations.
Balanced accounts, with both equity and fixed-income assets, should be separated into twp distinct equity and fixed-income categories. Each such category should be assigned its own cash balances so that the performance of each investment class will include returns specifically reflecting the use of cash equivalents and other substitutions. Although managers may be able to supply sufficient risk and volatility informatrion on each investment class to allow clients to make a reasonable judgment of results as if cash had been included, the information content form the separation of balanced portfolios into distince asset "pots" ( each with its own cash equivalent or substitute holdings) is too valuable to leave to managers choice.
Assuming that the balanced-account manager's assignment from the client is to change the asset mix periodically, managers altering the ratios between equities and fixed-income should make bookkeeping transfers of cash form one category to the other. Accounting for such transfers should, of course, be based on the specific cash tranfer dates.
Performance results form balanced accounts should, therefore, include the following:
Equities, including cash or substitute securities designated for potential investment in equities.
Fixed-income, including cash or substitute securities designated for potential investment in fixed-income.
Results for 3.a and 3.b should be compared against their respective, comparagble indexes, as is they were separated equity and fixed-income accounts.
Separating the parts of a balanced account as recommended provides valuable insights into the capabilities of managers in each distinct asset class, but the most significant performance criterion is still the combined, total-account results.
Results for the total account are best compared against equity and fixed-income proportions that reflect client objectives and guidelines; these proportions should be agreed to in advance by client and manager.
Comparative performance should then be calculated by apportioning the returns from each of the indexes chosen to represent each asset class to the agreed-to percentage bogey for that asset class. Assume, therefore, that client and manager have agreed to a balanced-account risk posture of 60 percent equities and 40 percent fixed-income. The comparative indexes used for equities (assume the S&P 500) should be weighted at 60 percent, and the appropriate fixed-income indexes (assume the Lehman Brothers Corporate/Govemment Bond Index) should be weighted at 40 percent, producing a number against which the total-account performance return should be compared.
In addition to actual results, performance for accounts utilizing leverage should be calculated and presented as if they had been made for all-cash (no leverage).
Indexes used for performance comparisons.
Managers should explain in advance any indexes used for performance comparisons to clients and prospects. These indexes should parallel the risk or investment styles the client account is expected to track.
Comparisons with specific measures (e.g., real returns adjusted for inflation, riskless returns from Treasury bills, etc.) may be used so long as AIMR Standards on other factors, as presented herein, are followed.
Treatment of convertible securities.
Convertible securities should normally be included in equity performance, unless manager and client agree in advance to their inclusion in fixed-income. If convertibles are subsequently shifted from the equity to the fixed-income segment, or vice versa, clients should be notified at the time of such shifting.
Formation and presentation of composite performance results by managers.
All managers should construct and present accurate composites of investment performance. Rules for such composites include:
Managers should compile and present such results for as long a period of time as accurate accounting can be accomplished, no less than 10 years if possible and up to 20 if practical.
Management organizations in business for less than 20 years should include results from the first full calendar year since their inception.
Each and every year of such results should be presented to prospective clients, unless different periods are specifically requested.
Results presented to client prospects should be shown both for individual years and for cumulative periods, as indicated in attached Table 1.
All client accounts should be included for whatever period such accounts were under management; portions of periods under management (i.e., managers choosing inclusion of portions) are prohibited.
Clients' accounts no longer under management should be included in composite(s). So-called "survivor" performance results are to be avoided.
Changes in a manager firm's organization should not lead to an altering of composite results. Results achieved by an organization are the organization's responsibility; changes in personnel do not constitute a justifiable reason to alter composite performance results.
Managers are encouraged to construct separate composites where valid reasons exist for doing so. A differentiation between taxable versus nontaxable accounts; fully discretionary versus not-fully discretionary; and other categories that entail varied investment styles, controls, or risks constitute valid reasons for separate composites. As indicated in Paragraph 9.d. below, however, managers should list all of their composites, with performance figures and other pertinent information on each, whenever performance results are presented. Any and all exclusions from any presentation of performance results should be clearly stated.
Composite performance calculation and presentation should be weighted by account size. A median of unweighted results may also be presented, but this should be accompanied by results weighted by account size, along with a statement that the latter is the recommended procedure as set by AIMR. Managers should also clearly delineate the following:
The number of client relationships included in each (and all) composite(s);
The total size of the composite for the beginning (January 1) and end (December 31) of each year;
The weighted average size of accounts constituting the composite; and
As indicated above, information on all assets excluded from any composite presentation should be presented.
Fixed-income and equity portions of balanced accounts should be included in their respective equity and fixed-income composites, provided they conform to Section V, Paragraph I above on balanced-account calculations.
Balanced-account composites should include only those accounts where the manager has discretion over changes from one asset to another. If the client has set balanced limits from which the manager should not deviate, the segregated assets (with their respective cash positions) should be included only with their like asset composite. (Example: Client gives Manager $6 million for bond management and $4 million for stock management, with no changes in mix to be made by Manager. The $6 million should be added to Manager's bond composite and $4 million added to Manager's stock composite-nothing to be included in Manager's balanced-account composite.)
Because performance results will be reported to clients along with either actual or average fee information (see Section V, Paragraph C), composite figures should likewise contain sufficient information to enable clients and prospects to compute performance on both a pre- and post-fee basis.
Managers should indicate typical indexes against which any and all composites are normally judged by respective clients. Thus, a manager's equity composite, which includes accounts with both large- and small-capitalization equities of comparable weighted size to the S&P 500, should be compared against the S&P 500, whereas a small- to medium-capitalization stock composite should be compared against the comparable index, for example NASDAQ, Russell 3000, etc. An account with, for example, 50 percent of its total in small- to medium-capitalization stocks and 50 percent in large capitalization stocks, should be compared against similar weighted separate indexes, rather than against either one of the two.
Composites should follow the same treatment of returns with and without cash, as indicated in Section V, Paragraph F.
Presentation of risk measurements such as alpha, beta, and standard deviation for individual-account returns within any composite is encouraged.
Other pertinent information for use in performance analysis should be added to composite presentations. For example, managers are encouraged to include (for each period) average market capitalization of stocks held, average quality and duration of bond holdings, etc.
Table 2 provides a sample recommended format for composite performance presentation to client prospects and consultants. Table 2 should accompany the specific performance results as presented in Table 1.
Verification of composites.
Audited composite and other performance figures are encouraged. At the very least, managers presenting performance data should make a positive written statement that full disclosure of assets included and excluded has been made and that calculations conform to AIMR Standards. Any deviations from AIMR Standards should be stated specifically.
The principles of these AIMR Performance Presentation Standards should apply to all individuals and organizations serving investment management functions. Consultants are likewise encouraged to adopt similar standards and principles in reporting performance data