I got a call earlier today from a California-based investment consultant who is wrestling with a problem and wanted to know if there were any rules available. Here’s the scenario:

One of their client’s managers subadvises the actual investing for a particular strategy. Two different returns are produced. One might be called the manager’s “marketed” return; this is the return that represents the manager’s overall historical performance, through subadvisors. The manager has the right to hire and fire managers, and is entitled (and more correctly, obligated) to show this return to prospects. Presumably this return is derived in accordance with the Global Investment Performance Standards (GIPS(R)) and is the corresponding return for the composite this client is in. The second is the client’s actual return. And so, which should this client be seeing?

As I’ve mentioned in the past, when faced with this kind of situation you should ask “what question are you trying to get answered?” If the client is interested in knowing how the manager performs in general for this strategy, then clearly the “marketed” return is what they should be seeing. However, if the client wants to know “how has this manager done for me?,” then they want to see their actual return. Apparently the client’s reporting agency is providing the “marketed return,” but this consultant wants the client to see their actual return.

To me, this is not unlike the world of wrap fee or SMA accounts, where SMA (separately managed account) sponsors typically use a “marketed return” to peddle the various strategies they offer. Here, the sponsor serves as a subadvisor, identifying managers to invest in the different strategies. When it comes to reporting to their clients, however, they show them their individual actual return.

Back to the consultant’s question: are there any rules? Well, no there aren’t, and I wouldn’t expect to see any. But, I think the answer is pretty clear. And if the reporting agency can’t get the reporting right, perhaps it’s time to look for a new one!