Mitigating Risks Associated with Composite Performance Reporting Using ACA’s Performance Analytics Services

Author

Travis Morgan

Publish Date

Type

Article

Topics

  • Performance
  • SEC Advertising Rule

There is no doubt that investment firms are faced with a multitude of daily challenges – marketing investment performance being one of them. This continues to be an important consideration when managing a firm’s risks. In addition to developing marketing materials and ensuring appropriate disclosures, firms must ensure that the performance being generated truly reflects the fund or strategy being offered. Key risk areas that firms should be aware of include:

  • Ensuring that the portfolio manager is adhering to the strategy and the characteristics being marketed
  • Ensuring that the benchmark shown is a fair and appropriate reflection of the market segment represented by the strategy
  • Ensuring that portfolios included in the performance calculation materially represent the strategy being marketed and that all material outliers have been reviewed and removed when applicable
  • When marketing related performance, such as that of a representative portfolio, ensuring that 1-, 5- and 10-years returns are not materially higher than the performance of all similarly managed portfolios

To appropriately assess and navigate each of these risk areas, firms should establish ongoing procedures to analyze the performance. In our experience, many firms either attempt to do this manually outside of their performance system or do not have procedures in place to test this at all. Often the technology that firms have in place either do not provide the tools needed to complete the ongoing analysis or the tools that they provide do not allow for customization to meet their specific needs.

To assist firms with this ongoing challenge, we are excited to announce the release of ACA’s Performance Analytics Services (“PAS”). PAS is specifically designed to provide customized solutions to the specific risk areas noted below.

Strategy adherence

By digesting performance and benchmark data, PAS builds out analytics that track how a portfolio manager adheres to the marketed strategy over time. Using metrics such as correlation, standard deviation, beta, etc., we can provide custom reports that show how the implementation of the strategy has potentially changed over time.

Benchmark appropriateness

Many firms are faced with the challenge of determining an appropriate benchmark. Often the portfolio manager is given discretion over this selection and they are trusted to select something that is an appropriate and fair representation of the strategy. With PAS, we can help ensure that the selected benchmark is appropriate and allow your firm to demonstrate that sufficient controls are in place to complete an ongoing analysis of this selection. Through metrics such as R2 and tracking error, we will be able to visually support or contradict how the selected benchmark reflects the implemented strategy.

Outlier analysis

Ongoing review of composite members is imperative for firms showing composite performance. When restrictions are introduced to a portfolio, or strategy changes are made without the appropriate personnel being notified, the performance results can be influenced and no longer represent the strategy that is being offered. Various practices can be implemented to ensure these are being caught prior to performance being disseminated. The most common approach is standard deviation analysis. With PAS, we can digest large amounts of portfolio return data and identify where these types of problems may exist. Additionally, we can provide an accurate estimate of the impact that each of these situations may have on composite performance.

Related performance review

The SEC’s new Marketing Rule mandates that firms ensure any related performance shown in an advertisement, such as representative portfolio returns, is not materially higher than if composite performance were being shown. As a result, firms are now tasked with two challenges. First, composite performance should be generated. Second, the firm must continually monitor that composite returns are not materially lower than the representative portfolio’s performance. Using performance analytics, we can produce composite performance to complete the ongoing required analysis to ensure compliance with this new requirement.

How we can help

PAS was specifically designed by ACA to offer our clients a customizable solution that reduces risk through the production of reports that can help streamline workflows and decision making around performance presentation. In addition to receiving the analytics reports, users of PAS will have access to a team of performance experts that can help you interpret the data being prepared for you and provide feedback based upon industry trends, regulatory expectations, and peer benchmarking.

Learn more

For additional information about this service or to learn how this service could strengthen your firm’s controls, please reach out to your ACA consultant or contact us below.

Contact us

Additional resources

Join us for the on-demand webcast Mitigate Risks Associated with Composite Maintenance using ACA’s Performance Analytics Services Dashboard as we introduce ACA’s PAS and how it can support firms like yours with creating and maintaining a robust process which mitigates risk while freeing up valuable time.

Watch on demand

About the author

Travis Morgan, CFA, CIPM, is a Managing Director in the performance services division of ACA Group. His primary responsibilities include overseeing GIPS® standards verifications and other performance-attestation engagements. His client base includes firms across the U.S. across many different asset classes and types, which gives him diverse experience in helping companies of all shapes and sizes come into compliance.

Travis holds the Chartered Financial Analyst (CFA) designation and Certificate in Investment Performance Measurement (CIPM) from the CFA Institute and has helped develop the CIPM curriculum. He is a member of the CFA Society of Los Angeles. Travis earned his Bachelor of Science degree in Business Administration with a focus on Accounting and his Certificate in Applied Finance and Economics from Southern Oregon University. Travis is based in southern Oregon.