The CFA Institute, an investment industry trade group formerly known as the Association for Investment Management and Research (AIMR), establishes and interprets the AIMR Performance Presentation Standards (AIMR-PPS) in North America. In more than a decade since their introduction, an increasing number of investment managers have voluntarily complied with the new standards that promote comparability of performance reporting.
Since 2001, the institute allows firms to claim compliance in advertising materials without showing performance results. In many instances, firms attempt to promote the standards as proxy for better investment practices or ethical conduct. In other cases, confusion arises when claims of compliance imply a different return calculation methodology, or when claims were made on individual accounts instead of on firm-wide composites.
Although the standards have evolved over time, the fundamental intent of the CFA Institute remains intact – to provide a fair representation of a manager’s discretionary investment capabilities by avoiding cherry-picking “model”, or “representative” accounts. Since performance measurement is a very important aspect of investment process, we would like to present a few points that may help to better clarify what it means to be AIMR-PPS compliant.
Note: effective in 2006, the institute’s Global Investment Performance Standards (GIPS) will replace AIMR-PPS as its global performance presentation standards.
Standards reporting is on the aggregate level
Firms report AIMR compliant data at “composite” levels, not on individual accounts, unless an entire composite consists of a single account. A composite is a group of accounts with similar characteristics. As a practical matter, an account in a composite with strong performance may perform poorly. This is because no two accounts are exactly alike, but every account must be in a composite. For example, if a portfolio with three-month average maturity is included in a “short-duration” composite that consists mostly of one-year average maturity accounts, it will likely have different returns from the composite. Perspective investors should evaluate the dispersion of composite returns, preferably the full distribution of all accounts in a composite, instead of relying on aggregate level returns.
AIMR-PPS are presentation standards, not new methodologies or ethical standards
After drafting the standards in 1987, AIMR had a six-year public commentary period to incorporate established industry practices and ethical standards. The new standards did not represent a different calculation methodology, nor did they suggest better accuracy or higher ethical conduct – they merely standardized them. A tongue-in-cheek industry joke illustrates the point: “Performance presentation standards do not make cheating impossible, they only make sure that everybody is cheating the same way.”
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