Performance Perspectives Newsletter

with David Spaulding, DPS, CIPM

Performance Perspectives – March 2023

VOLUME 19

ISSUE 3

MARCH 2023

Since 1990, TSG, an employee-owned business, has had an increasing presence in the money management industry.

TSG is the fastest-growing verification firm, serving clients around the globe, with assets ranging from less than $100 million to more than $1 trillion. We provide an array of other performance measurement services and products, including consulting, publishing (The Journal of Performance Measurement®), research, and training. We also host the Performance Measurement Forum, the Asset Owners’ Round Table, and the Annual PMAR™ Conferences.

We are actively involved as members of the CFA Institute and other industry groups. The Spaulding Group has also led the charge for the industry in the handling of error correction, attribution guidelines/ standards, and Investment Performance Measurement Analyst Certification (since handed over to the CFA Institute and now called the CIPM
program).

Several of our senior staff regularly speak at and/or chairs industry conferences. Our founder and CEO, David Spaulding, is a frequent author and source of information to various industry publications. Our firm continues to make huge contributions to our industry, in terms of valuable content, innovative ideas, and volunteer activities.

Our clients appreciate our industry focus and understanding of their business, their needs, and the opportunities to make them more efficient and competitive.

 

The Journal of
Performance Measurement®

CURRENT ARTICLES

Highlights from the 2022 GIPS Conference

  • Jennifer Barnette, CIPM and Ashley Reeves, CIPM

Evaluating Benchmark Misfit Risk

  • Stephen Campisi

The Journal Interview

  • Todd Jankowski, CFA, CFP

TAMPS, Third Party Platforms, and Model Marketplaces

  • Noreen Beaman

Measuring Target Date Fund Performance

  • Ron Surz

PLEASE SEE OUR CURRENT ISSUE:
https://tsgperformance.com/free- journal-of-performance-measurement/

Our Institute classes:
Python for Performance Professionals
Fundamentals of Performance Measurement
Performance Measurement Attribution
Fixed-Income Attribution
Masterclass on the GIPS® Standards for Asset Owners with State Street (Free)

Jeffrey Mortimer
Invesco

“We approached the Spaulding Group with specific training needs for our diverse, global Performance and Analytics team and The Spaulding Group exceeded our expectations. Not only did they deliver quality content, exercises, and practical case studies, but
we were able to weave our own narrative into the course which increased the value and application to our team. There really is only one choice when it comes to Attribution training, and it is TSG.”

This month’s newsletter is admittedly a bit short. We could ramble on-and-on about the topic we address, but feel that getting right to the point is sufficient. It’s an important one, and we hope what we share has value to you and your organization.

Sleeves: do they constitute “extracted performance” under the new SEC Marketing Rule?

In the past month, we’ve gotten multiple inquiries into the status of sleeves and the new SEC Marketing Rule.

On page 195 of the rule we find “‘Extracted performance’ means ‘the performance results of a subset of investments extracted from a portfolio.’”

The Rule doesn’t explain what it means to “extract” performance.

What is a sleeve?

I asked the folks at Orion about sleeves, and Ryan Donovan provided the following:

“Sleeves within Orion allow firms to take multiple models (strategies) and assign them to accounts. Each model (strategy) then turns into a sleeve (sub-account) in Orion. For example, a firm may have an Aggressive and Conservative strategy. The firm can then create a sleeve (sub account) for the aggressive strategy and one for the conservative strategy. From a cash management perspective each of the sleeves can contain a targeted amount of cash allowing for cash to live in each sleeve based on the strategy.

“Sleeves can also allow a firm to hold a particular asset within each strategy. For example, Apple could be held in both the Aggressive and Conservative sleeves. We accomplish this accurately because the firm places trades within Orion’s trading and rebalancing tool. Therefore from a reporting and performance standpoint we can track when the asset was purchased and sold to track the appropriate sub-account.” <emphasis added>

I have considered sleeves to be sub-accounts or sub-portfolios, and Ryan confirms that this is their view, as well.

At the custodian, an institution’s or individual’s assets might be stored in a single, unique, “legal” account. At the asset advisor, their accounting system might manage it in multiple sub-portfolios, each being distinct from the others, so as to allow individual strategies to be separate and apart.

To me, sleeves fail the test of being “extracted performance.” There is no “extraction” being done. Rather, the accounting system is set up to manage the assets separately. In many cases, an account may have 5-10 or more sleeves, each being managed differently, and in some cases, by different individuals or even advisors [in a sub-advisory relationship, not unlike unified managed accounts, or UMAs].

Unsure?

In this same section of the Rule we find “The final rule prohibits an adviser from presenting extracted performance in an advertisement unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio from which the performance was extracted.”

And so, if you choose to include sleeves in a composite, and are concerned that the SEC examiner who visits might consider them to constitute extracted performance, then simply include a disclosure that “upon request, we will provide the performance results of the total portfolio from which performance was extracted,” though I’d avoid the use of the term “extracted,” as it would seem to suggest you believe it’s extracted. Instead, I’d have “… from the entire portfolio of which the sleeve is a member of.”

I should also mention that the SEC’s Marketing Rule says that carve-outs of composites are not extracted performance, but rather hypothetical performance, which brings with it a whole other area of requirements.

I still don’t feel that sleeves are the same as carve-outs. Are they “extracted”? I don’t think that, either. For official ruling, we’ll have to wait for the SEC.

TSG’S 2023
INVESTMENT PERFORMANCE MEASUREMENT
CALENDAR OF EVENTS

 

Asset Owner Roundtable 

  April 26, 2023 • Phoenix, AZ

Performance Measurement Forum

  April 27-28, 2023 • Phoenix, AZ

GIPS Workshop

  May 23, 2023 • New Brunswick, NJ

Launch of Women in Performance

May 23, 2023 • New Brunswick, NJ

PMAR North America 

  May 23-24, 2023 • New Brunswick, NJ

Performance Measurement Forum 

  June 22-23, 2023 • Edinburgh, Scotland

◼ Performance Measurement Forum 

  November 9-10, 2023 • Porto, Portugal

◼ Asset Owner Roundtable 

  November 29, 2023 • Orlando, FL

◼ Performance Measurement Forum 

  November 30 – December 1, 2023 • Orlando, FL

For additional information on any of our 2023 events, please contact Patrick Fowler

PMAR Co-Sponsors

TSG GIPS® Standards for OCIO/Consultants

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We are the most knowledgeable, experienced and respected team of GIPS standards specialists in the world. We know the pitfalls and we know the solutions to make GIPS compliance as easy as possible for you and your firm.

Below are some GIPS Standards 101 resources that can help you whether your firm is already compliant just starting to think about compliance.

An Overview of Compliance and Verification
GIPS compliance? Verification? Examinations? A short high-level overview of the GIPS Standards.

How to prepare for a GIPS verification?
In this webinar, you will discover what you need to do to prepare for your verification.

TSG GIPS® Standards for OCIO/Consultants
Incorporating the GIPS Standards into your sales and marketing
Discover how you can get the most out of your claim of GIPS compliance.

10 Common Mistakes Firms Make with the GIPS Standards
In this post, we reveal 10 common (non-fatal) mistakes we see compliant firms make again and again. Hopefully, this will help you avoid these mistakes.

The seven most confusing things about the GIPS standards
From discretion to significant cash flows, composite construction to advertising – there is a lot that is confusing about the GIPS standards. In this post, we reveal seven of the most confusing things.

TSG GIPS® Standards for OCIO/Consultants
TSG GIPS® Standards for OCIO/Consultants

About TSG Performance

Since 1990, TSG, an employee-owned business, has had an increasing presence in the money management industry.

TSG is the fastest-growing verification firm, serving clients around the globe, with assets ranging from less than $100 million to more than $1 trillion. We provide an array of other performance measurement services and products, including consulting, publishing (The Journal of Performance Measurement®), research, and training. We also host the Performance Measurement Forum, the Asset Owners’ Round Table, and the Annual PMAR™ Conferences.

We are actively involved as members of the CFA Institute and other industry groups. The Spaulding Group has also led the charge for the industry in the handling of error correction, attribution guidelines/ standards, and Investment Performance Measurement Analyst Certification (since handed over to the CFA Institute and now called the CIPM
program).

Several of our senior staff regularly speak at and/or chairs industry conferences. Our founder and CEO, David Spaulding, is a frequent author and source of information to various industry publications. Our firm continues to make huge contributions to our industry, in terms of valuable content, innovative ideas, and volunteer activities.

Our clients appreciate our industry focus and understanding of their business, their needs, and the opportunities to make them more efficient and competitive.

 

The Journal of
Performance Measurement®

CURRENT ARTICLES

Highlights from the 2022 GIPS Conference

  • Jennifer Barnette, CIPM and Ashley Reeves, CIPM

Evaluating Benchmark Misfit Risk

  • Stephen Campisi

The Journal Interview

  • Todd Jankowski, CFA, CFP

TAMPS, Third Party Platforms, and Model Marketplaces

  • Noreen Beaman

Measuring Target Date Fund Performance

  • Ron Surz

PLEASE SEE OUR CURRENT ISSUE:
https://tsgperformance.com/free- journal-of-performance-measurement/

Our Institute classes:
Python for Performance Professionals
Fundamentals of Performance Measurement
Performance Measurement Attribution
Fixed-Income Attribution
Masterclass on the GIPS® Standards for Asset Owners with State Street (Free)

Jeffrey Mortimer
Invesco

“We approached the Spaulding Group with specific training needs for our diverse, global Performance and Analytics team and The Spaulding Group exceeded our expectations. Not only did they deliver quality content, exercises, and practical case studies, but
we were able to weave our own narrative into the course which increased the value and application to our team. I’m a repeat customer of services provided by the Spaulding Group and appreciate their adaptability and breadth
of support. There really is only one choice when it comes
to Attribution training, and it is TSG.”

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