by Amy Parvaneh, 01/20/2015
“Don’t confuse a bull market for brains.” - Humphrey B. Neill
Because it’s easy to do so—especially when a
general lack of transparency in the investment industry renders it difficult
for investors to determine exactly from where their returns are coming.
Integrity and trust have always been key
principles in the investment industry, but they’ve become even more poignant
issues following the financial crisis as investor confidence largely gave way.
Along the same line, the need for investment managers to apply consistent
return calculations and provide accurate performance information has also become
increasingly crucial.
Questions remain regarding the degree to which
investment firms are making efforts to calculate their returns and publicly
report their numbers. Certain legal regulations exist, but how widely and
sincerely is self-reporting practiced and appreciated in the industry today?
Taylor Frigon Capital Management LLC tells of its commitment to
being transparent with its investing strategy and performance results. The
boutique wealth manager based in San Luis Obispo, Calif. serves private clients
and institutions throughout the U.S. It claims compliance with the Global
Investment Performance Standards and is independently verified by Ashland Partners & Co. for GIPS
compliance reporting.
“We’ve been doing this compliance from the get
go,” said President and Chief Investment Officer Gerry Frigon, who founded the firm in 2007 after more than 20 years
of investment strategy, planning and management for private and institutional
clients.
“GIPS reporting is a lot of extra work, it’s
expensive, and we’ve gone back and forth at times about our decision to report
and be verified,” he said. “But transparency is the point we want to drive
home. We have taken the initiative to show our performance. We’re not going to
run from our performance no matter what it is. We’ve been through some periods
of really good outperformance and sometimes underperformance. But over time, if
you have a disciplined strategy, we know that it will work.”
Frigon spoke of what he has observed during the
three decades of his investment management experience.
“I grew up in a world over the last 30 years
where, frankly, the typical investment adviser wants to run away from
performance, not embrace it,” he said. “I think we knew that was a problem in
the industry. But somehow, the industry has succeeded in pulling the wool over
the eyes of the investor. You’re fighting a battle of firms that have gotten
used to saying, ‘Performance doesn’t matter; all clients care about is
service.’”
There is no official set of data to tell exactly
how many investment firms pursue transparency at what levels. But the Global
Investment Performance Standards, created by CFA Institute, is becoming more and more widely accepted as a
universal language for presentation of investment performance.
“The GIPS standards represent an important part
of our effort to restore public trust in our industry,” wrote Annie Lo, director of GIPS Asia Pacific
at CFA Institute and Trevor Persaud,
managing director for ASEAN and Taiwan at Russell Investments, in a 2013 issueof the CFA Institute Magazine.
“By choosing to comply with the Standards,
investment management firms assure prospective clients that the historical
‘track record’ they report is both complete and fairly presented,” the article
said. “GIPS compliance allows firms to expand their business territories and to
participate in competitive bids against other compliant firms globally.”
Institutional investment data research firm eVestment recently published its 2014
study of the value of GIPS compliance. Analysis was based on survey responses
of 101 participants and on the firm’s internal database of individual managers.
The survey primarily included advisers managing institutional funds and likely
does not represent the trend among advisers who oversee portfolios of individual
investors.
Data showed that about 74% of the eVestment
database population claims compliance with GIPS, and 82% of those that are in
compliance receive verification of their reporting.
About 65% of consultants and investors exclude
managers from consideration “some or all the time” if they do not claim
compliance with GIPS.
Qualitative survey responses about GIPS included
thoughts that compliance is “demanded by international markets,” and that the
standards serve as “a scorecard” and “a tool” to evaluate managers. Some said
that although the standards “aren’t perfect,” they do provide a certain
guideline.
Frigon pointed to the general lack of
understanding in the investment industry, even among portfolio managers,
regarding their performance.
“The typical adviser has no idea why his or her portfolio has been
performing OK,” he said. “If the average investor were to ask his or her
manager, ‘What are the business reasons that this or that has happened in my
portfolio?’ the manager doesn’t know. It’s possible that the manager is in such
a broad index strategy that the performance is kind of accidental. Don’t
confuse a bull market for brains.”
He added that there’s been a gradual but clear change in the investment
industry over the past few decades.
“It used to be that a stock broker would actually get to know the
companies first, and then they would go out to sell the stock to their
clients,” he said. “That’s the traditional stockbroker. Some of the best money
managers ever were the ‘old’ kind of stockbrokers. They understood how to
analyze the company. But we’ve gotten so far from that. That art has been
completely thrown out the window for the most part. The money manager
types now are in mutual funds, and it’s become a quarter-to-quarter numbers
game instead of understanding the companies within them.”
Frigon said Taylor Frigon as a firm hopes to see a shift in the lack of
adviser knowledge and value.
“Our clients know that we are ridiculously transparent and that we adhere
to a strict set of standards,” he said. “And we tell our clients that there may
be periods where the performance might not make sense immediately. That’s
because we’re not making our investment decisions based on the whims of the
market. We’re doing so based on the businesses we’re buying and based on the
things happening inside the businesses. Those things don’t necessarily happen
in line with the market.”
“Overall, the issue becomes one of investor trust
and manager integrity, and GIPS could be a useful tool to bring about a
restoration of those principles in the investment industry,” Frigon said.
“I think being GIPS-compliant is like the cherry
on top at this point,” he said. “Most advisers are not even reporting any kind
of performance. They are dancing around it, and that’s what I think is
shocking. That’s what I think needs to be exposed. Our clients are used to
getting those performance reports. It’s standard for them.”
Jonathan Boersma, head
of professional standards at CFA Institute, said that he thinks the “biggest
challenge [that asset managers face today] is the lack of integrity in the
industry that has led to investors’ lack of trust and a collapse in investor
confidence.”
Even as
the details of the GIPS standards have and will continue to evolve to fit the
complex needs of the financial industry, the core objectives of the GIPS
standards “remain unchanged [which is] to support fair competition and to
promote comparability through consistent calculation and presentation of
investment performance information,” he said. “The GIPS standards address some
of [today’s challenges] because they are ethical standards that focus on
fairness and improving transparency, which can help restore trust.”