“AIMR’S PERFORMANCE PRESENTATION STANDARDS,” JONATHAN J. STOKES, JO...

2. “AIMR’s Performance Presentation Standards,” Jonathan J. Stokes, Journal of Performance

Measurement (The Spaulding Group, Winter 1997/98)

Purpose:

To test the candidate’s understanding of the requirements of the AIMR Performance Presentation

Standards.

LOS: The candidate should be able to

AIMR Performance Presentation Standards Handbook (Session 20)

• determine the role of the AIMR-Performance Presentation Standards (AIMR-PPS

) in

ensuring ethical presentations of investment returns;

• evaluate a sample performance presentation to determine whether the presentation complies

with the AIMR-PPS standards.

“AIMR’s Performance Presentation Standards” (Session 20)

• explain the AIMR-PPS standards regarding composite creation, calculation of returns,

presentation of results, and disclosures.

Guideline Answer

Template for Question 22

Application of the AIMR-PPS Standards

i. Use of Martin’s investment record at her former firm:

The AIMR-PPS standards state that the performance results of a past firm or affiliation cannot be

used to represent the historical record of a new firm entity. This requirement is especially true for

HM because the prior performance record cannot be solely attributed to the manager or managers

who are attempting to claim the record as their own. That is, Martin was only a member of the

stock selection committee of her previous firm and was not solely responsible for the

performance results. By using Martin’s investment record at her former firm, HM has failed to

comply with AIMR-PPS standards.

ii. Use of the equity segments of the HM’s balanced accounts:

The AIMR-PPS standards permit HM, when presenting performance return, to split its

balanced accounts into separate portfolios based on asset class. However, the AIMR-PPS

standards also require that cash be allocated to the segment returns of a multiple-asset

portfolio when segment returns are being presented either alone or as part of a single-asset

composite as evidence of the firm’s ability to manage the segment by itself. By not including

cash with its equity segments, HM may be distorting the performance of those segments and

has failed to comply with AIMR-PPS standards.

iii. Use of HM’s balanced accounts currently under management:

The AIMR-PPS standards require that composites must exclude terminated portfolios after the

last full performance measurement period the portfolios were under management, but

composites must continue to include terminated portfolios for all periods prior to termination.

For HM, information is not explicitly provided on whether the firm has had any terminated

portfolios. If HM had terminated portfolios, these portfolios must be included in an

appropriate composite through the last full period they were under firm management.

Otherwise, by including only the performance history of all its balanced accounts currently

under management, HM’s balanced return would not be in compliance because the return

would show survivor-only performance results and be skewed by “survivorship bias.” By

using only the balanced accounts currently under management, HM may have failed to

iv. Use of model performance:

According to the AIMR-PPS standards, composites must include only assets under

management and may not link simulated and model portfolios with actual performance. HM

may present model results to a potential client as supplementary information, but the model

results must be clearly identified as such and must not be linked to actual results.

v. Use of three selected HM fixed income accounts:

The AIMR-PPS standards require that firms present the performance history of portfolio

composites and that they include all discretionary, fee-paying accounts in composites of like

style and strategy. This prevents firms such as HM from choosing their best performing

portfolios as “representative accounts” without showing the firm’s overall performance. HM’s

current practice may distort fixed income returns. By using only the performance history for

three selected accounts to represent fixed income returns, HM has failed to comply with

AIMR-PPS standards.

vi. Providing annual numbers from 1996 to the present:

The AIMR-PPS standards require firms to show annual returns for 10 years or since inception

of the firm if inception is less than 10 years. This standard prevents managers from presenting

only the selected times when the firm has excellent returns. HM must present annual returns

for all years from 1994 to present. By presenting annual numbers only from 1996 to the

present, HM has failed to comply with AIMR-PPS standards.