Evestment ACA GIPS Survey Results 2014 - ACA Compliance Group

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The subset of managers analyzed from the eVestment database includes .... eVestment provides a flexible suite of easy-to
Contents Why the Survey?

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Survey Highlights

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Consultant and Investor Perspectives

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Asset Manager Demographics

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Who Claims Compliance with the GIPS Standards?

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Verification

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Views of Compliance and Verification

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Compliance and Verification — Stakeholder Perception

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General Trends

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About the Organizers of the Survey

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www.evestment.com | www.acacompliancegroup.com/gips

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Why the Survey? As the Global Investment Performance Standards (GIPS®) gain more acceptance and international adoption, there are frequent questions about the current state of GIPS compliance and about the firms that do and do not claim compliance with the GIPS standards. In particular: Who claims compliance with the GIPS standards and why? Who receives verification? What value do consultants and investors place on compliance with the GIPS standards? How much importance do consultants and investors place on a manager being compliant? To address these questions, eVestment and ACA Performance conducted an industry survey focusing on various stakeholders’ perspectives on the value of GIPS compliance. We originally co-sponsored a survey on GIPS compliance in 2009, and conducted the survey again in 2012. This 2014 report is our third update on industry wide views on GIPS compliance. The survey was sent to two groups: asset managers and consultants/investors. The asset manager survey was sent to contacts at all active managers that voluntarily input data into eVestment’s traditional database as of September 30, 2013. The asset manager population was unbiased with respect to size: assets under management (AUM) of those receiving the survey ranged from less than $100 million in AUM to over $1 trillion in AUM. The consultants/investor survey was sent to consultants and investors who subscribe to eVestment’s database.

Survey Highlights

74%

82%

of the eVestment database population claims compliance with the GIPS standards

2 Out Of 3 consultants/investors exclude managers from searches some or all of the time if they do not claim compliance with the GIPS standards

of firms that claim compliance receive a verification

64% of consultants/ investors believe pension funds, foundations, endowments & other asset owners will claim compliance with the GIPS standards when new GIPS guidance is released

www.evestment.com | www.acacompliancegroup.com/gips

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Consultant and Investor Perspectives Consultant and investor demand is the primary driver behind asset managers claiming compliance with the GIPS standards. Consultant and investor RFPs requiring compliance with the GIPS standards have been the norm for traditional asset managers for years. For this survey, we wanted to understand the consultant and investor perspective, and asked: How important is compliance with the GIPS standards, and why? How important is verification? The survey results confirm that two out of three consultants/ investors exclude managers from searches some or all of the time if the managers do not claim compliance with the GIPS standards. Why? Consultants/investors view GIPS compliance as an indicator of a manager’s institutional quality, and the survey results indicate that GIPS compliance is often used as a screening tool in new manager searches. Do you exclude managers from searches if they do not claim compliance with the GIPS standards?

35% Some or all the time No

65%

We also asked the consultants/investors about their perspectives on verification. The results are compelling: over 85% place high emphasis on verification during their due diligence processes. How important is third-party verification of a firm in your manager search process?

15% Not Important Important or very important

85%

www.evestment.com | www.acacompliancegroup.com/gips

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Our final question for consultants/investors is related to guidance expected to be released by CFA Institute on the application of the GIPS standards to pension funds, endowments, foundations, and other similar entities. We asked consultants/investors about their views on the industry’s adoption of this guidance. Interestingly, a majority of the respondents believe asset owners will ultimately claim compliance with the GIPS standards. Guidance on the application of the GIPS standards to pension funds, endowments, foundations and other similar entities is expected to be released in 2014. Do you believe these entities will start claiming compliance with the GIPS standards when such guidance is released?

36%

No Yes

64%

Consultant/Investor Open-Ended Responses “GIPS compliance generally makes the manager selection and due diligence process easier.” “Over time it will be another scorecard by which peers can evaluate their risk-adjusted performance and hopefully encourage smarter investing.” “[GIPS compliance] is helpful for being sure we have reliable performance information. When it is absent, we are willing to dig into performance calculations ourselves, but it sets a higher bar for the manager since that is more work for us.” “It is very rare for our firm to consider investment management firms that are not GIPS-compliant.” “I definitely prefer a manager that is GIPS compliant and verified. In many cases our universe is GIPS compliant and it provides a point of confidence in terms of how they do things.” “From my searches, there are less Canadian managers claiming compliance with GIPS than there are U.S. managers claiming compliance with the GIPS. But this is slowly changing.”

www.evestment.com | www.acacompliancegroup.com/gips

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Asset Manager Demographics The data presented in this report was obtained from two sources: the eVestment database and the responses to the survey questions. The subset of managers analyzed from the eVestment database includes individual managers who self-reported information including assets under management, country, and GIPS compliance and verification status as of September 30, 2013. We used eVestment information to extract our quantitative analysis on rates of compliance and verification. Our qualitative analysis was derived from the results of 101 survey responses. Given the tight range between the population and the survey response rates, we believe that the survey responses are representative of the global market place.

Who Claims Compliance with the GIPS Standards? According to eVestment data, three out of four firms claim compliance with the GIPS standards. Eightytwo percent of compliant firms are also verified. As the table below illustrates, the rates of compliance and verification remain fairly consistent over time. Overall Statistics 2009 eVestment Data

2012 Survey

eVestment Data

2014 Survey

eVestment Data

Survey

GIPS Compliant

68%

75%

73%

75%

74%

72%

Verified

75%

84%

80%

82%

82%

85%

Does Firm Size Matter? In general, the rate of compliance is highly correlated with AUM; as a firm’s AUM increases, so too does the likelihood that the firm claims compliance with the GIPS standards. Whether due to cost, resource constraints, or questions about perceived value, smaller firms claim compliance at lower rates than larger firms. Compliance by AUM - eVestment Database - 9/30/13 100% 90% 88% 80%

83% 79%

70% 69% 60%

% Compliance

50% 40% $20B

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Does Region Matter? In general, the adoption of the GIPS standards remains more prominent in North America relative to other parts of the world, continuing the trend we noted in our 2012 survey. The regions with the highest rates of compliance are as follows: Compliance by Region - eVestment Database - 9/30/13

Verification In addition to compliance statistics, we also reviewed the eVestment database for information pertaining to verification. Although not required as part of a claim of compliance, verification is a de facto requirement for access to U.S.-based institutional assets. The demand for verification appears to be very high, as 82% of compliant firms in the database are verified, a slight increase from the 2012 survey of 80%. Percentage of Compliant Firms Verified – eVestment Database - 9/30/13

18%

No Yes

82%

www.evestment.com | www.acacompliancegroup.com/gips

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Notably, rates of verification vary significantly by region: firms based in Europe are more likely to be verified than firms in other regions. Percentage of Compliant Firms Verified by Region – eVestment Database - 9/30/13

100%

98%

% Compliant 88%

83%

80%

78%

78% 71%

60% 39%

40% 20% 0% UK

Europe Ex UK

US

South Africa

Asia

Canada

Australia

Views of Compliance and Verification Given the high numbers of firms claiming compliance, why do some firms choose NOT to claim compliance with the GIPS standards? Predictably, the answer is cost. In fact, the perception of the time commitment and costs required to claim compliance continue to be the most often cited reasons for not claiming compliance. In addition to cost and time, perceived value was another concern that increased in mentions compared to the 2012 survey.

Please select the reasons why your firm does not claim compliance with the GIPS standards (please check all that apply).

2012

2014

33%

29%

9%

14%

Too time consuming

21%

39%

Cost Prohibitive

39%

43%

We do not see the value.

14%

25%

Too cumbersome

9%

7%

It doesn’t make sense in our industry.

8%

7%

21%

21%

We plan to claim compliance in the next 12 months. Lack of technology/data management issues

Other (please specify)

www.evestment.com | www.acacompliancegroup.com/gips

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The primary reasons given for why firms comply with the GIPS standards are clear: marketing to institutional sponsors and industry best practice. From the managers’ perspectives, consultants and investors continue to drive the demand for GIPS compliance. Which of the following options best describe your firm's reasons for claiming compliance with the GIPS standards (please check all that apply)?

2012

2014

Marketing to institutional sponsors

81%

82%

Marketing to private clients

25%

30%

Operational efficiency/better internal controls

39%

49%

Industry best practice

82%

80%

Satisfaction of regulatory requirements

37%

45%

Transparency

54%

59%

Higher ethical standard

64%

65%

Consultant demand

56%

56%

0%

1%

Other (please specify)

Rates of verification are quite high, and we examined the reasons provided for receiving a firm-wide verification. The responses match the reasons firms comply with the GIPS standards and are also consistent with our prior survey results. Please select up to three of the most important reasons for verification.

2012

2014

Marketing to institutional sponsors

78%

77%

Marketing to private clients

12%

18%

Operational efficiency

16%

22%

Industry best practice

78%

72%

Satisfaction of regulatory requirements

30%

30%

Transparency

36%

32%

Consultant demand

49%

45%

1%

2%

Other (please specify)

www.evestment.com | www.acacompliancegroup.com/gips

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Does your firm have performance examinations conducted on specific composites? Answer Options

2012

2014

No

12%

23%

Yes, 1 to 5 composites

57%

48%

Yes, more than 5 composites

31%

28%

In addition to verification, firms can opt to receive performance examinations for specific composites. A performance examination is a detailed examination of a specific composite’s compliant presentation by an independent verifier. We compared the responses from this survey to the one we conducted in 2012 to determine if there are trends with respect to performance examinations. Our survey results indicate that fewer firms are opting to receive performance examinations.

Compliance and Verification — Stakeholder Perception When it comes to the importance of compliance with the GIPS standards and verification, the perceptions differ greatly between compliant and non-compliant firms. We asked the following question to all survey participants: “How important is compliance with the GIPS standards to the following stakeholders?” Important & Very Important

Stakeholder: Prospective Clients

Compliant Firms

Not Important

9%

91%

Non-Compliant

71%

Firms

29%

Stakeholder: Consultants/RFPs

Compliant Firms

Non-Compliant Firms

3%

97%

35%

65%

www.evestment.com | www.acacompliancegroup.com/gips

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We asked the following question to all survey respondents: “How important is verification to the following stakeholders?” The responses received confirm that managers believe verification is important for both client development and investor relations. Stakeholder: Prospective Clients

Compliant Firms

20%

80%

Non-Compliant

59%

Firms

41%

Stakeholder: Consultants/RFPs

Compliant Firms

9%

91%

Non-Compliant

41%

Firms

59%

General Trends Finally, we asked asset managers to tell us their opinions of where the industry is headed. We also compared the responses to those received in our 2012 survey. Opinions appear to have shifted slightly in favor of more transparency for the reporting of investment performance. Please provide your view on the following statements:

Managers advertising performance should be required to abide by some type of reporting standards such as the GIPS standards. Yes No

2012 84% 16%

2014 90% 10%

www.evestment.com | www.acacompliancegroup.com/gips

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Regulatory bodies (the SEC, FSA, etc.) should develop more detailed performance advertising rules and regulations. 2012

2014

Yes

52%

53%

No

48%

47%

Investors and consultants will ultimately require hedge fund managers to comply with the GIPS standards. Yes

2012 73%

2014 76%

No

27%

24%

The GIPS standards will become more important for asset managers in emerging markets. 2012

2014

Yes

82%

83%

No

18%

17%

Manager Open-Ended Responses "[I] understand the value of having standards; however, feel the disclosure requirement and some of the presentation standards are not helpful for actual investors! They don't know what most of that information means--especially [high net worth clients]." "Though standards are important so investors can do "apples to apples" comparisons, GIPS compliance seems to be more of a tool for institutional investors and consultants - another box they can check in their overall risk assessment." "Private Equity firms should be required to comply if hedge funds are going to have to do so. Firms catering to individuals should be required to comply since there are lots of advisors who do not follow these rules managing lots of assets." "The GIPS [standards] provide an essential control and marketing toolkit for advisors." "It's necessary (or should be) for firms with more complex products and/or multiple segregated accounts. But, it is unnecessarily cumbersome and expensive to verify GIPS compliance for small firms with simple products and/or few segregated accounts." "We are primarily a wealth management firm. For these clients GIPS has not been necessary in the past, but may be in the future. For institutional marketing it has become necessary, but this is a small portion of our asset base." "It is essential in the US and essential if you run mostly separate accounts, but less so if you run funds." "It is demanded by international markets." "We acknowledge GIPS compliance provides a competitive advantage, but a cost/benefit analysis is required for implementing the GIPS standards." "It is not perfect but a standard nonetheless." "It is a tool for institutions, if they understand it, to judge managers." “[Compliance] with Global Investment Performance Standards (GIPS) ensures integrity in performance measurement and a level playing field in performance measurement across the global asset management industry. Importantly, it also gives existing and prospective clients confidence in the underlying performance being reported.” www.evestment.com | www.acacompliancegroup.com/gips

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About the Organizers of the Survey eVestment provides a flexible suite of easy-to-use, cloud-based solutions to help the institutional investing community identify and capitalize on global investment trends, better select and monitor investment managers and more successfully enable asset managers to market their funds worldwide. With the largest, most comprehensive global database of traditional and alternative strategies, delivered through leading-edge technology and backed by fantastic client service, eVestment helps its clients be more strategic, efficient and informed. For more information about eVestment please visit www.evestment.com or contact us at [email protected]. ACA Performance Services, a division of ACA Compliance Group, offers GIPS verification and related services to investment managers across the globe. ACA Performance Services was formed in 2013 with the combination of ACA Beacon Verification Services and Vincent Performance Services. Globally, ACA Performance Services is the largest team of professionals solely dedicated to GIPS verification and related services. For more information regarding ACA Performance Services, please visit www.acacompliancegroup.com/gips.

If you have any questions regarding the survey, please contact: Mark Scott Media Relations, eVestment 678.238.0761 (ph) 404.450.8265 (cell) [email protected] Kamelia Dari, CFA Senior Principal Consultant, ACA Performance Services 866.279.0750 (ph) [email protected]

www.evestment.com | www.acacompliancegroup.com/gips

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