THE VALUE OF GIPS COMPLIANCE: 2012 MANAGER AND CONSULTANT SURVEY

THE VALUE OF GIPS COMPLIANCE: 2012 MANAGER AND CONSULTANT SURVEY May 2012

INTRODUCTION What impact have the Global Investment Performance Standards (GIPS ) had on the investment industry? How important is GIPS compliance to clients, prospective clients, and consultants? Do consultants exclude managers that don t claim GIPS compliance from searches? Database and analytics provider evestment Alliance and GIPS verification firm ACA Beacon Verification Services teamed up and invited asset managers to participate in a web-based survey intended to gather data on how the GIPS standards have affected their marketing efforts. Justin Guthrie, CFA ACA Beacon Verification Services Christie Dillard, CIPM ACA Beacon Verification Services Matt Robison evestment Alliance Alex Trogstad evestment Alliance TABLE OF CONTENTS SURVEY BACKGROUND AND GOALS 1 INVESTOR/CONSULTANT SURVEY 3 SURVEY DEMOGRAPHICS 5 VIEWS OF GIPS COMPLIANCE 6 WHO CLAIMS GIPS COMPLIANCE? 7 WHY DO FIRMS COMPLY WITH THE GIPS STANDARDS? 8 VERIFICATION 9 COMPLIANCE AND VERIFICATION STAKEHOLDER PERCEPTION 11 GENERAL TRENDS 13 ABOUT THE ORGANIZERS OF THE SURVEY 14 ii

SURVEY BACKGROUND AND GOALS Within the U.S. investment management industry, GIPS compliance and verification have long been considered de facto requirements for firms to be included in requests for proposals ( RFPs ) for institutional asset mandates. For larger, more institutionally oriented asset managers, claiming compliance with the GIPS standards has been part of the compliance fabric for some time. In recent years, GIPS compliance has gained more attention globally, most recently in emerging markets. In addition, firms of all sizes that wish to be considered for institutional asset mandates are being pushed to consider the GIPS standards. The survey gathered information from investment managers in order to answer the following questions: Who claims compliance with the GIPS standards and why? Who receives independent third-party verification and why? How do managers perceive the value that stakeholders place on GIPS compliance? Do consultants and investors exclude managers that do not claim GIPS compliance from their searches? The goal of our survey was to solicit feedback from a broad range of investment managers while, at the same time, avoiding any size, location, or institutionally focused biases. The population for the survey was created from all firms that voluntarily submitted returns to evestment Alliance as of September 30, 2011. To be eligible for the survey, these firms had to have at least one traditional product populated on the database. We believe this population to be fair and representative of the global institutional space for two reasons: First, evestment is the top third-party institutional investment database used by more than 70% of the Top 50 Consultants ranked by Worldwide Institutional Advisory Assets (source: Pensions & Investments 2009 Consultant Rankings); and second, managers can input firm and product data into evestment for free, and there are no asset level constraints. 339 75% Survey respondents. of survey respondents claim GIPS compliance. 81% of consultants exclude managers from searches if they do not claim GIPS compliance some or all of the time. 39% of non-gipscompliant respondents cite cost as a prohibiting factor. 100% of compliant firms believe GIPS compliance is important or very important to consultants and the RFP process. 82% of compliant firms also receive independent thirdparty firm-wide verification. 69% of respondents believe GIPS is essential to compete in the institutional marketplace. 82% of respondents believe GIPS will become more important in emerging markets. 1

The survey was sent to a total of 2,193 firms that had submitted information to evestment Alliance as of September 30, 2011. The survey was available to these recipients from February 16, through March 7, 2012. When the survey window closed, a total of 339 firms had responded to the survey, resulting in a response rate of 15%. Note that firms submitting information to evestment Alliance are asked in evestment s data input questionnaire whether or not they claim compliance with the GIPS standards. Interestingly, 73% of the 2,193 firms that received the survey claim compliance with the GIPS standards (as referenced by their latest database entries). Of the survey respondents, 75% responded that they claim compliance with the GIPS standards. Given the tight range between the population and survey response rates of compliance, we believe that the following survey results are representative of the global marketplace. Compliant Non-Compliant Verified Non-Verified Population 73% 27% 80% 20% Survey Respondents 75% 25% 82% 18% We hope you find the results of the survey useful. Given the premium the market has placed on due diligence, particularly in light of increased investor and regulator driven demands for transparency, it is our belief that the information presented here will be of great benefit to your firm s marketing efforts. If you have any questions regarding the survey, you may contact Christie Dillard of ACA Beacon Verification Services (866.279.0750) or Alex Trogstad of evestment Alliance (866.408.3273). 2

INVESTOR/CONSULTANT SURVEY Before we detail the results of this year s survey, we wanted to highlight a short but extremely important survey of institutional consultants and investors. That is, what is their view of GIPS compliance? This is of paramount importance, as these gatekeepers and asset owners control the vast majority of institutional assets. Their opinion of the GIPS standards may in fact be the most critical since consultants and investors are the target market for asset managers. We sent a two question survey to consultants, investors and plan sponsor clients of the evestment database. We received over 80 responses, summarized below. Do you exclude managers from searches if they do not claim compliance with the GIPS standards? 33% Yes 19% No 48% Sometimes 81% of consultants that participated in the survey indicated that they exclude managers who do not claim compliance from searches some or all of the time. How important is third-party verification of a manager s claim of compliance with the GIPS in the manager selection process? 6% Not Important 58% Important 36% Very Important For managers who claim compliance with the GIPS standards, consultants and investors feel very strongly that the managers should also undergo independent third-party firm-wide verification. 94% of respondents indicated that third-party verification is important or very important during the manager selection process. Finally, we asked consultants and investors for open-ended comments regarding GIPS compliance and the manager selection process, a selection of which are included below: We view GIPS compliance as a characteristic of institutional quality, as most of our clients are large, public pension funds. It is important for our clients considering the fact that they are constantly under the media s eye, and we try to avoid headline risks that are more likely to occur with firms that are not GIPS compliant. We don t exclude managers from a search if they are not GIPS compliant, but we do view it as an increased hurdle that has to be overcome in our due diligence process. We also encourage managers that we otherwise like to go through the GIPS certification process. GIPS compliance is the standard - every manager should be following the GIPS procedures. 3

GIPS compliance is very important in our due diligence process. If a manager is not GIPS compliant we need to have a clear and understandable reason why they are not. If that reason is not clear and understandable the manager will generally not be included in a traditional search. Unless the manager just started, we would want them to provide GIPS compliant performance. It is not a deal breaker if a manager isn t GIPS compliant, but we prefer managers who have verified GIPS compliant performance. GIPS compliance and verification is a must for sub-advised strategies. However, for other funds, GIPS would be preferred, but are not compulsory. All else being equal, if a manager does not have GIPS, they won t be selected. I am reassured when a manager not only claims compliance, but has been verified for more recent periods. The money management market is so competitive that if I had to choose between two managers, one with GIPS-compliance and one without, I would chose the GIPS-compliant manager. Some international markets are more difficult and I will be more flexible. I wish all managers were GIPS compliant. Saves time and effort in the manager search. Definitely an advantage in the selection process. 4

SURVEY DEMOGRAPHICS A wide range of firms were represented in the survey, from smaller, emerging managers to the largest asset managers. Respondents were diverse in terms of assets under management, client type, geographical location, and investment focus. What are your firm s Assets Under Management (AUM)? 27% Under $500 Million 24% $500 Million to $2 Billion 17% $2 Billion to $5 Billion 12% $5 Billion to $20 Billion 8% $20 Billion to $50 Billion 12% Over $50 Billion Please select your geographic region: 68% US 11% Global (offices and investment teams in more than one country) 9% Europe 7% Canada 2% Australia 2% Asia 1% Africa.3% Other (please specify) 0% Latin America What percentage of total firm AUM is composed of institutional investors? 25% Less than 25% 13% 26% to 50% 20% 51% to 75% 42% Greater than 75% Consistent with our 2009 survey, smaller, boutique firms were well represented: 51% of firms responding manage less than $2 billion in AUM, with one half of those managing less than $500 million. 37% of respondents manage between $5 billion and $50 billion in AUM, while the largest managers, those with in excess of $50 billion under management, represent approximately 11% of survey respondents. Over 68% of survey respondents represent firms principally located in the United States. 11% represented themselves as global asset managers, European firms account for 9%, while Canadian firms represent 7%. Of all respondents, 62% answered that more than half of their total AUM is composed of assets. 5

VIEWS OF GIPS COMPLIANCE We asked all respondents (compliant and non-compliant firms) to express their overall view of GIPS compliance. 69% of respondents answered that a claim of GIPS compliance is essential to compete in the institutional arena, which is consistent with the 2009 response rate to the same question of 72%. Interesting to note is the fact that only 29% of responding firms believe GIPS compliance remains a competitive advantage, compared to 40% in 2009. While claiming compliance with the GIPS standards 10 years ago may have provided an edge over competitors, the survey results indicate that today GIPS compliance is a de facto requirement to compete in the institutional space. Which of the following describe your firm s view of GIPS compliance? (please check all that apply) 69% It is essential to compete in the institutional arena. 58% It reinforces our firm s commitment to a higher ethical standard. 47% It enhances our internal controls. 29% It provides a competitive advantage. 13% It is not worth the time and expense from a marketing perspective. 7% Other (please specify) Key Findings: Survey respondents continue to reinforce the belief that GIPS compliance is required to compete for institutional mandates. Fostering a culture of compliance is high on the list of survey respondents, as 58% responded that compliance with the GIPS standards is part of their commitment to a higher ethical standard. 6

WHO CLAIMS GIPS COMPLIANCE? The survey results revealed that 75% of the firms responding claim compliance with the GIPS. The exact same response rate of 75% also occurred in our 2009 survey. This result is also consistent with the evestment database population level rate of 73%. Does your firm currently claim compliance with the GIPS? 75% Yes 18% No 7% No, but we intend to within the next 12 months. The percentage of respondents who represent compliant firms did not change from our prior survey. Interestingly, there was a shift in the makeup of respondents representing compliant firms. We note that there has been a large uptick in GIPS compliance among smaller managers, as the rate of compliance increased from 58% to 70% for firms managing less than $500 million. In general, the rate of compliance is highly correlated with AUM; as a firm s AUM increases, so does the likelihood of their claiming compliance with the GIPS standards. Compliant Firms by AUM range 2012 Survey 2009 Survey Less than $500m 70% 58% $500m-$5b 77% 75% $5b-$50b 71% 77% Greater than $50b 84% 94% total 75% 75% Regionally, compliance with the GIPS standards was highest in the U.S., with 81% of respondents representing that their firms claim compliance, while 71% of those classified as global managers claim compliance. Yes, my firm currently claims compliance with the GIPS standards. 81% US 57% Canada 56% UK 50% Europe (excluding UK) 70% Global (offices and investment teams in more than one country) 83% Australia 50% Africa 67% Asia 75% All Regions 7

Key Findings: Smaller, boutique asset managers have increased their rate of compliance with the GIPS standards, most likely in an effort to compete for institutional assets. In general, the larger the firm, the more likely it is to comply with the GIPS standards. The rate of compliance was highest in the United States, with global asset managers having a high rate of compliance as well. WHY DO FIRMS COMPLY WITH THE GIPS STANDARDS? We asked the firms who participated in the survey that were not GIPS compliant why they did not claim compliance with the GIPS standards. The cost associated with GIPS compliance was the number one reason cited in 2009, and it remains at the top of the list for non-compliant firms in 2012 (coincidentally, at a rate of 39% in 2009 and 2012). Please select the reasons why your firm does not claim GIPS compliance. (please check all that apply) 33% We plan to claim compliance in the next 12 months. 9% Lack of technology/data management issues 21% Too time consuming 39% Cost prohibitive 14% We do not see the value. 9% Too cumbersome 8% It doesn t make sense in our industry. 21% Other (please specify) We asked a similar question to firms who do claim compliance with the GIPS standards. The top three reasons for claiming compliance remain the same when compared to 2009 survey results: industry best practice, marketing to institutional consultants, and higher ethical standard. Which of the following options best describe your firm s reasons for claiming GIPS compliance (please check all that apply)? 81% Marketing to Institutional Sponsors 25% Marketing to Private Clients 39% Operational Efficiency/Better Internal Controls 82% Industry Best Practice 37% Satisfaction of Regulatory Requirements 54% Transparency 64% Higher Ethical Standard 56% Consultant Demand.4% Other (please specify) 8

Key Findings: For firms that do not claim compliance with the GIPS standards, cost was again cited as the primary reason; however, 33% of the non-compliant respondents expect to comply in the future. Consultants and plan sponsors continue to drive the demand for GIPS compliance, with marketing to institutional investors again cited as one of the top two reasons represented firms comply. The GIPS standards have succeeded in their mission of creating an ethical set of standards, as 82% of respondent firms comply because the GIPS standards are considered industry best practice. VERIFICATION Of compliant firms, 82% choose to have their claim of compliance verified by a third-party verification firm. Has your firm s claim of compliance been verified? 82% Yes 18% No We asked firms why they choose to have their GIPS claim of compliance verified. The top two reasons for verification, marketing to institutional sponsors and industry best practice, align perfectly with the top two reasons firms choose to comply with the GIPS standards. Please select up to three of the most important reasons for verification. 78% Marketing to Institutional Sponsors 12% Marketing to Private Clients 16% Operational Efficiency 78% Industry Best Practice 30% Satisfaction of Regulatory Requirements 36% Transparency 49% Consultant Demand 1% Other (please specify) 9

There has been debate in the marketplace recently regarding performance examinations. Do consultants and prospective investors want or require performance examinations on the composites representing the strategies they are considering? How many performance examinations should a firm receive? Should they include all marketed composites or just flagship products? Opinions vary, but survey results indicate that the majority of firms that receive firm-wide verification also receive performance examinations 88% of responding verified firms had at least one performance examination conducted on a specific composite. Does your firm have Performance Examinations conducted on specific composites? 12% No 57% Yes, 1 to 5 composites 31% Yes, more than 5 composites Key Findings: Verification is highly correlated with compliance, as 82% of compliant firms also receive a third-party firm-wide verification. Firms choose to undergo independent third-party verification because it is considered industry best practice and because they believe institutional plan sponsors demand it. Survey respondents indicate that performance examinations are the rule and not the exception; 88% of firms that undergo firm-wide verification also receive at least one performance examination. 10

COMPLIANCE AND VERIFICATION STAKEHOLDER PERCEPTION Next we asked compliant and non-compliant respondents about the importance of GIPS compliance to various stakeholders. The results are quite extraordinary. How important is GIPS compliance to the following stakeholders? Existing Clients Compliant Firms Non Compliant Firms 19% Very Important 33% Not Important 77% Not Important 19% Important 4% Very Important 48% Important Prospective Clients 48% Very Important Compliant Firms Non Compliant Firms 42% Important 18% Very Important 6% Not Important 46% Important 40% Not Important Consultants/RFPs Compliant Firms 76% Very Important.4% Not Important 24% Important Non Compliant Firms 29% Very Important 50% Important 21% Not Important The perceptions of stakeholder value varied significantly between compliant and non-compliant respondents. 76% of compliant firms believe that GIPS compliance is very important to consultants and for RFPs, versus only 29% of non-compliant respondents. Similarly, 94% of compliant firms believe GIPS compliance is important or very important to prospective investors, versus only 60% of non-compliant firms. 11

Similarly, we asked GIPS-compliant managers for their perceived value of GIPS verification to various stakeholders. How important is verification to the following stakeholders? (compliant firms) Existing Clients 41% Important 14% Very Important 45% Not Important Prospective Clients 36% Very Important 44% Important 20% Not Important Consultants/RFPs 58% Very Important 34% Important 8% Not Important Survey respondents representing compliant firms believe that third-party verification is important to consultants and prospective investors, while somewhat less important when reporting performance to existing clients. 92% of compliant respondents believe verification is important or very important to consultants and for RFPs. Key Findings: 100% of compliant respondents indicated that GIPS compliance is important or very important to consultants and for RFPs. Compliant firms believe, by a wide margin, that GIPS compliance and verification are integral to their relationships with consultants and prospective investors. Non-compliant firms, compared to compliant firms, do not believe that consultants or prospective investors place a high degree of importance on GIPS compliance. 12

GENERAL TRENDS We gathered some general information from firms regarding their views and future expectations regarding certain performance and GIPS-related topics. These responses comprise all survey respondents. Please provide your view on the following statements: Yes No Managers advertising performance should be required to abide by some type of reporting standards such as the GIPS standards. Regulatory bodies (the SEC, FSA, etc.) should develop more detailed performance advertising rules and regulations. Investors and consultants will ultimately require hedge fund managers to comply with the GIPS standards. The GIPS standards will become more important for asset managers in emerging markets. 84% 16% 52% 48% 73% 27% 82% 18% Key Findings: 84% of all survey respondents believe that managers should be required to abide by some type of reporting standards such as the GIPS standards, yet they were split in their opinions on whether regulatory bodies should develop more detailed advertising rules. 73% of respondents believe investors and consultants will require hedge fund managers to comply with the GIPS standards in the future. One of the goals of the GIPS standards, to promote adoption of one global standard, appears to be intact; 82% of respondents believe GIPS compliance will become increasingly important in emerging markets. 13

ABOUT THE ORGANIZERS OF THE SURVEY ACA Beacon Verification Services (formerly known as Beacon Verification) offers GIPS verification and consulting services to investment managers across the globe, providing clients with the skills, expertise, and knowledge drawn from our team s 70-plus years of GIPS experience. In our eleven year history, the GIPS division of ACA has worked with more than 300 asset managers ranging in size from under a billion to over $400 billion. In addition to verification, ACA Verification also offers GIPS compliance and performance measurement consulting, training, workshops, and custom scope procedures. evestment is a global provider of institutional investment data intelligence and analytic solutions. We deliver extensive separate account, hedge fund and commingled fund data through robust, userfriendly products, with an unparalleled commitment to client service. Its diverse clients include leading investment consultants, asset managers, plan sponsors and others among the world s foremost financial organizations. The company was founded in 2000 and is headquartered in Atlanta, Georgia with offices in New York, London, Sydney, Hong Kong and regional sales offices in Boston, Chicago, Raleigh, Seattle, and Toronto. 14