Trust comes with GIPS compliance
Category: Asia, China, Philippines
By Heda Bayron*
A common language for firms to communicate with investors
Early this year, Taikang Asset Management Co Ltd (Taikang AMC) became the first insurance-owned asset management firm to claim compliance with the Global Investment Performance Standards (GIPS) in China. The GIPS standards are a set of universally accepted standards that allow investors to compare and evaluate the performance of various asset managers. For a company like Taikang AMC that is looking to expand business with local asset owners such as pension funds and foreign institutional investors, the benefits are clear.
“For insurance asset management companies in China, there are no unified and enforced investment performance standards. The GIPS standards are really a good way to represent fairly our investment management skill set and capability to investors. We also want to be more internationalised. Complying with the GIPS standards helps foreign investors to understand insurance asset management companies in China and attracts more assets for us to manage,” says Peng Cong, chief risk officer, Taikang AMC.
China has been expanding access to foreign institutional investors through the Qualified Foreign Institutional Investor (QFII) programme, RMB Qualified Foreign Institutional Investor (RQFII) programme and the Hong Kong-Shanghai Stock Connect. In addition, Mr. Peng says more and more local financial institutions and asset owners are aware of the GIPS standards, including the massive National Social Security Fund. Compliance with the GIPS standards opens opportunities for Taikang AMC to gain more business from third-party investors (as opposed to only managing assets from Taikang Life). Taikang AMC manages over 700 billion RMB (US$112.67 billion) assets, almost 40% from third-party investors.
In the Philippines, fund managers and trust officers are also looking toward the standards to remain competitive amid the economic integration of the Association of Southeast Asian Nations (ASEAN). The new ASEAN Collective Investment Schemes (CIS) accord allows asset managers in an ASEAN member country to be able to sell their funds in another member country under a streamlined authorisation process. Started last year, the ASEAN CIS is only operational in Singapore, Malaysia and Thailand for now, but will eventually encompass the Philippines.
“We looked at where the global markets are going and we see that GIPS have become the standard of performance reporting. Asian integration is here. If we want to be competitive, if we want to show that we are comparable and capable in handling international funds, then we have to be compliant,” says Robert Ramos, CFA, president of the Trust Officers Association of the Philippines (TOAP) and first vice president of Union Bank of the Philippines.
Noli de Pala, CFA, also of TOAP and vice president of wealth management at EastWest Bank, echoes the same view: “Given the competition and the increasing breakdown of borders between our countries in the region, it is going to be imperative really soon for investment managers to prove themselves to asset owners that we will adhere to best practices and minimum standards, and we will be verified by a third party as complying to these standards. It’s really, eventually, about survival.”
GIPS are based on the fundamental principles of espousing global best practices for ethical behaviour and fair representation and full disclosure of investment performance results. The standards were created to provide an ethical framework for the calculation and presentation of the investment performance history of an investment management firm. The standards are overseen by CFA Institute, the world’s largest association of investment professionals. In the Asia-Pacific region, there are 11 GIPS country sponsors (37 globally) as of December 31, 2014, which are typically industry associations that promote the GIPS standards locally, represent their local market, and provide input in the continued global development of the standards.
“In the era of funds passporting in Asia and the opening up of previously restricted domestic investment market, standards for the comparability and presentation of investment performance will be critical to providing investors the additional transparency necessary to compare and evaluate asset management companies and their investment products. These standards serve as a common language for firms to communicate with investors as well as a seal of good housekeeping that encourages investors’ trust,” says Annie Lo, CFA, CIPM, director of GIPS, CFA Institute.
Taikang AMC became GIPS-compliant in less than a year. Mr. Peng attributes this achievement to a number of factors, including support from senior management, leveraging the expertise of its subsidiary in Hong Kong that previously implemented the GIPS standards, and extensive training and development of its staff about the standards.
The project was a firm-wide undertaking, involving IT, investment, risk management, sales, marketing, operations, and compliance. One to two years before the implementation, the firm conducted some internal training and learning for their staff with the help of its GIPS consultation service provider.
“The GIPS project had impact on the front office, middle office, and back office. For the front office, it helped streamline the investment strategies especially when selecting the benchmarks. It also helped them think about our investment style and how to follow the investment strategy and performance management. It helped clean up product line – that is, what types of products should be sold to what types of clients. For the middle and back office, the process allowed us to check all historical data and find whether there were errors or missing data and to correct them. For sales and marketing department, it allowed them to provide more data and information to clients,” explained Mr. Peng.
ICBC Credit Suisse Asset Management (ICBCCS), the first joint venture between a Chinese domestic commercial bank and a foreign asset manager, was the first Chinese asset management firm to claim GIPS compliance in 2007. Wayne Bi, deputy general manager at ICBCCS, says the company started the GIPS compliance process with the full backing of its shareholders who emphasised “self-discipline and internal control.”
“In 2007, the firm was only two years old. The management team decided that it was important to show that ICBCCS is a long-term investment adviser and adheres to the highest standards globally. GIPS compliance was one of the decisions they made to build a long lasting sustainable business model and to show that ICBCCS is built on a solid foundation,” explained Mr. Bi.
“There was no quick business expectation to get a return or a business outcome at the time. It was more focussed on improving internal control, to show self-discipline, with the expectation that some day the firm will start its international business, and GIPS, being a common language, will prompt other international investors to do business with us,” he added.
In China, Mr. Bi says institutional investors have a good understanding of GIPS, but from a cost perspective only select firms will have the incentive to comply. “In the last several years the government has started to allow international investors to invest in China via QFII and RQFII. As a GIPS compliant firm, it shows that ICBCCS is very international oriented; our performance numbers are consistent and are presented in one language. That helps in the business negotiations a lot. Sometimes when an international investor issues an RFP, they ask whether you are GIPS compliant. If you check yes, it reduces the communications barrier. It helps the international firm understand your strategy and performance numbers. So it saves time in the negotiation, improves negotiation efficiency. Trust comes with GIPS compliance,” explains Mr. Bi.
Still, Bi says more promotion and education about GIPS is needed in China. “From the asset management firms’ side, we also have our work to do. The data process and the infrastructure work need to step up as well. In general, the IT for domestic asset management firms, whether in terms of budget or capability, is still relatively weak compared to their counterpart in the developed markets. Hopefully, the domestic asset management firms as well as financial IT firms will invest more in systems such as performance measurement tools,” he adds.
One common issue in GIPS compliance projects in emerging markets is the availability of software systems to support GIPS calculations.
“To be able to do the GIPS computation, we need a robust system that can compute composite returns. We haven’t had those systems. It’s only been over the past two-to-three years that software vendors from Europe and the US came in and presented their programs to us,” says Mr. Ramos in the Philippines. “But there would be smaller fund managers who won’t have the capability to buy these systems.”
Mr. De Pala says awareness of GIPS in the Philippines is ironically being driven by asset managers. In developed markets, asset owners such as pension funds and insurance companies drive compliance with GIPS through their RFPs.
“In the long run, I believe that asset owners who hire would be more aware of standards. It would behove us to demand asset managers to adhere to this standard. We can’t hide behind some weird presentation to mask certain inadequacies over a period of time. Asset management and trust are knowledge businesses that are selling competency as opposed to products like mutual funds and unit trusts. That would further our goal of differentiating our industry from the wider financial industry,” he says.
On the other hand, in India, investment performance reporting standards are becoming familiar to firms providing back office support to international financial services institutions despite the GIPS standards are not being formally promoted in the country (there is yet to be a country sponsor in India). However, some note that qualified professionals, especially those who have earned the Certificate in Investment Performance Measurement (CIPM), a qualification offered by CFA Institute, are in short supply.
“It is encouraging to see increased interest in the GIPS standards across emerging markets in Asia. I think as Asian markets mature, there will be even greater impetus to adopt the standards not only for firms to better compete but also in order to build a financial market that is transparent and trustworthy,” says Ms. Lo of CFA Institute.
* Heda Bayron is a communications manager at CFA Institute. For more information about GIPS, visit www.gipsstandards.org