GIPS: To Port or not to Port – that is the Question?

By Ambika D’Souza, VP, Global Head of GIPS, State Street Global Advisors

1. Introduction

The investment management industry has seen its fair share of mergers and acquisitions (M&A) and team lift-out activities over the years. During this process the aspect of the portability of investment track records is sometimes overlooked.

2. Global Investment Performance Standards (GIPS[1])

“Portability” of performance refers to the ability of one investment manager to reference in his or her own investment performance presentations the historical performance record of either a predecessor investment manager or that of the predecessor’s investment manager’s portfolio manager’s performance achieved while at another firm.

This blog will focus on the portability requirements from a GIPS perspective, and will not touch on any local regulatory requirements related to the portability of investment track records. When a GIPS compliant firm acquires another GIPS compliant firm, the acquiring firm needs to satisfy the provisions contained with the GIPS Guidance Statement on Performance Record Portability. Under this Guidance Statement the primary premise is that the performance is the record of the GIPS compliant firm and not of any individual portfolio manager.

This Guidance Statement also lays out three portability tests that must be satisfied on a composite track record specific basis, in order to link the prior performance results to the ongoing performance record at the new firm or affiliation.

Additionally, the acquiring firm has “one year to bring any non-compliant assets into compliance”, and the acquiring firm “must disclose if the performance from a past firm or affiliation is linked to the performance of the firm”.

3. Portability Tests (under GIPS)

The Guidance Statement states that “performance of a past firm or affiliation must be linked to or used to represent the historical performance of a new or acquiring firm if, on a composite-specific basis:

1. substantially all of the investment decision makers are employed by the new or acquiring firm (e.g., research department staff, portfolio managers, other relevant staff);
2. the decision-making process remains substantially intact and independent within the new or acquiring firm; and
3. the new or acquiring firm has records that document and support the performance.”

• Portability Test 1 – Most investment managers struggle with what constitutes “substantially all of the investment decision makers”. The ability to substantiate the rationale used by the acquiring firm on the “substantially all” aspect of this test can be done through the review of marketing materials of the acquired firm. No prescriptive language exists in GIPS that gives what the “substantially all” number should be.

• Portability Test 2 – As with Portability Test 1, the acquiring firm must be able to substantiate that the decision making process remains intact. For example if the investment process changes at acquisition, does this constitute fine-tuning of the process or has it changed substantially?

• Portability Test 3 – This test is the one most Investment Managers overlook, as it is assumed that the acquired firm will follow local regulatory and GIPS requirements on records retention. One valuable exercise during the due diligence phase of any M&A transaction is to sample test this assumption, in order not to have any records retention surprises after the transaction has been sealed.

If these GIPS portability tests are met, the acquiring firm must show the history from the prior firm and link to the track record at the new firm if the existing track record (in the acquiring firm) is the same strategy. The “must” part of the guidance is to prevent the acquiring firm from being selective in which track record is presented.

If the acquiring firm wishes to port a track record all the above three tests must be satisfied on a composite by composite basis. One composite’s failure to meet the portability tests has no impact on other composites.

The concept of portability revolves around the ability to bring a track record from one firm to another, where the track record from a GIPS perspective is the composite performance at the acquired GIPS firm. One of the Q&A’s on the GIPS website (https://www.gipsstandards.org/standards/faqs/Pages/index.aspx) answers the question on whether the acquiring firm can create new composites by selecting portfolios from the acquired firm. The answer is no, “it would not be representative to recreate a record with only selected portfolios. The word “composite” refers to the entire composite from the old firm. In order for a firm to be able to link the composite from the old firm to the ongoing performance of the new firm, the entire composite performance history, including all portfolios, must be used.”

4. Acquisition vs. Lift-outs

From a GIPS portability perspective satisfying the three portability tests may be difficult based on whether it is a full blown acquisition or a team lift-out. In the majority of cases when it is a team lift-out the team departures are typically not on friendly terms. In those instances satisfying any of the GIPS portability criteria may become difficult.

5. Surviving Track Record Assessment (under GIPS)

If the acquiring firm has a similar strategy (with a historical track record) to that in the acquired firm, analysis needs to be done on which track record “survives”.

“For example, as a result of a merger, two composites (“C” and “D”) are combined in a merged composite “CD.” If the firm is able to satisfy all the rules of portability and determines that composite C is the surviving composite, then the performance history from composite C must be linked to the on-going record of composite CD. Although the assets from composite D are included in composite CD, the performance history of composite D is not linked to the ongoing record of composite CD but should be made available upon request.”

The selection of which track record survives can be made on various factors such as longevity, good performance etc. Currently no prescriptive language exists in the GIPS Guidance Statement.

6. Conclusion

Concluding, the discussions around portability considerations from both a GIPS and regulatory perspective should be part and parcel of all M&A transactions rather than an after-thought on the conclusion of the transaction.

To meet Ambika D’Souza and learn more about this topic, attend the FTF Performance Measurement Americas Conference, March 8-9 in New York.

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The views expressed in this material are the views of Ambika D’Souza through the period ended March 31, 2017 and subject to change based on market and other conditions. They are also not the views of State Street Global Advisors (SSGA).

SSGA
One Lincoln St, Boston, MA 02111-2900
CMINST-14810
Expiration: 1/31/2018

[1] The Global Investment Performance Standards (GIPS®) were created, funded and administered by CFA Institute (formerly the Association for Investment Management and Research, or AIMR®) to provide an ethical framework for the calculation and presentation of the investment performance history of an investment management firm. The GIPS standards are a voluntary set of standards based on the fundamental principles of full disclosure and fair representation of performance results.

 

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