I am conducting a “non-GIPS(R)” verification this week for a client who uses “rep” (representative) account performance for marketing purposes. This particular firm is not easily able to comply with GIPS (Global Investment Performance Standards) today, and so this seems to be a reasonable alternative.

Last week we held a meeting with the Universal Advisor Performance Standards  (UAPS) board, to continue our review of the draft. We briefly discussed the various approaches to create historical performance for marketing.

These events caused me to think that perhaps we should develop a rating scale, that ranks the various approaches, from “best practice” to “not best practice” (would we call the worst of these “worst practice”?).  The following graphic represents my current thinking:

Perhaps we should have numeric designations for these, too. I’d give composite returns that are derived using equal-weighting a ten (or maybe it should be a 9.9). Note that asset-weighted has three options; and these should get individual ranks. Perhaps 9.5 when beginning value plus weighted cash flows is used, 9.3 when beginning value, and 9.1 (or perhad 8.9?) when the aggregate method is used.

As an aside, I’ve addressed the asset-weighting issue in the past, and my basic question would be what value is it to an investor to see an asset-weighted composite return if they are not aware that the result may be skewed by one or two very large accounts? As for the aggregate method, I stand on my earlier position that this return fails to meet the definition of a composite return and can present nonsensical results.

I will have more to say on this in this month’s newsletter. In the mean time, feel free to offer your thoughts.