‘Performance measurement has come of age and is poised for a highly successful future’ is the message coming from the industry. This may indeed signify that the era of the mere accountant, book-keeper and checker is well and truly upon us, but those in the measurement industry would see it only conferring benefits on the users of their services.
“Performance measurement is coming into its own and becoming a profession in its own right,” says Corinne Collie of Russell/Mellon Analytical Services in London, the joint venture between consultants and asset managers Frank Russell and global custodians Mellon. “It is no longer just a back office function, bundled into a custodian or consultancy relationship.”
European pension funds are looking for more timely and sophisticated services, she says. “Managers want to know where the performance came from and not just what it was.”
Peter Warrington of WM Company in London, which was absorbed into the Deutsche Bank fold as part of the acquisition of Bankers Trust, where it sits as part of the global analytics division, agrees. “There is a greater demand for analysis than before, with both the frequency and depth of analysis increasing.” With WM’s new systems, performance can be measured every 24 hours, he adds. In terms of performance attribution, both pension funds and asset managers now want to go down to individual security level, so that it is no longer just a class such as UK equities, but down to company level. “You will know which are the 10 stocks that had most impact on your performance,” says Warrington.
Collie points out that attribution has been around since the early 1990s, but that the market is still a long way from saturation. “Initially only the sophisticated plans added attribution analysis, now every plan wants a form of attribution.” The euro has had a real impact here as the question of sector attribution is coming to the fore. “The switch to sector has had a lot of implications for the analytics we are providing.”
Warrington concurs: “Now as country barriers are going, we will say the reason why your fund outperformed was because you were 10% overweight in pharmaceuticals and you were very good at stock selection in telecom companies.”
But Collie does question the extent to which daily performance calculation is practical. “Everyone would like to daily measurement, but you have weigh the additional knowledge you are going to get with the increased work and resources taken. You have to balance the cost against the benefits.” The cost of obtaining indices information on a daily basis is still very expensive for daily attribution, she points out.
Where Collie thinks there is a real need for improvement is in the delivery of performance reports from providers, and admits: “Pension funds often have to wait six to eight weeks to get their report. We are working on that via the Mellon technology base.” She expects that to come on stream later this year. “Once that conversion is on stream, we will be able to do more timely analytics. Eventually, this reporting will be done over the internet.”
The other area that is attracting more attention is that of risk measurement, where, Russell/Mellon use an outside provider Measurerisk.com. In Collie’s view the focus has been very much on value at risk analysis. “But there is a lot of education to be done out there about VAR,” she adds.
According to Warrington: “Continental Europeans are very keen on risk, so WM’s analytics will be available in whatever form our clients want them.”
At WM in Frankfurt, David Mark says that German investors are much more interested in risk, compared with those in UK, who are more concerned with returns. “Investors here understand risk.”
But he sees it as something as a generational issue with the young money managers more interested in performance questions than the older ones. “They are very interested and not just in one dimensional return, but in two dimensional risk. We have a product which generates a report for managers, and we go to investors every six months and analyse each fund and tell them where the relative returns come from, which areas have done well and not so well and show the risk data for each portfolio.”
In Germany, most of the institutional business is through specialised investment funds( Spezialfonds) and the WM operation there before the Deutsche Bank acquisition was run with Commerzbank, which has a small shareholding in the business. “This position is not changing,” says Mark. He is hopeful that the DB connection will benefit them on the institutional side in Germany.
Their main competitor in Germany is DPG, which are owned by a number of banks, who include performance measurement as part of the services when an investor sets up a specialised fund.
The recent acquisition by DB of the Intersec business has had an impact on the European performance measurement, as Intersec has operations in Switzerland and Italy. “These businesses are flourishing, particularly in Switzerland, and we plan to encourage it to grow even more,” says WM’s Warrington. “We are looking at all aspects of the business for the future, but at the moment we are carrying on as before.” Intersec’s primary business is carrying out strategic research, which is used extensively by the fund management industry when developing business plans. “Intersec go far more into analytics, more so than WM, so we are analysing this aspect to see if we can use some of these services,” he says. Another restructuring on the Continent has been the acquisition in the Netherlands of Stichting Performance by Aon.
Warrington views the arrival of the Global Investment Performance Standards (GIPS) as a major factor in shaping the performance industry in Europe. “We are pleased to see that fund managers are becoming the equivalent of GIPS-compliant, even though each country is doing its own thing. What they are saying is that the 400 or 500 funds they manage fall into perhaps nine or 10 composites. In the past we have been told that each fund was different.”
WM has been trying to set up universes for years on the continent, but now Warrington explains: “thanks to GIPS we have found that 90% of these have common themes. There are about eight core composites, so we will be able to look across about eight core composites, so will be able to look across the universe of Euroland median equities performance.” But GIPS is also a winner for WM in another way as the company undertaking certification that a money manager is GIPS compliant. “Managers will realise that unless you have a good name behind you, it is pointless in being GIPS-compliant.”
Another area WM wants to develop is that of performance measurement of consultants’ advice. Warrington explains: “How it works is that the consultant tells us at the beginning of each quarter which managers he is going to recommend for a brief, and then we look at how well they have performed against the brief. So, if the consultant recommends a manager who outperforms he gets a plus, and a negative if they underperform.” This is done over three years and consultants can say that if you carried out our recommendations you would be 2% wealthier as we recommended better managers.” A number of the consultants say they are doing it themselves. “Some of the pension funds are saying that if you are doing that why don’t you give the information to WM and let them measure it as they are independent.” He agrees this is a sensitive topic but reckons the consultants know it is coming.
Collie at Russell/Mellon sees the performance business explode in future, aided by internet developments. She believes that the two
traditional routes of consultant and custodian connection will no longer hold sway to the same extent and that more emphasis will be on seeking out the measurer of choice by the pension fund and manager. “We are being appointed as the measurer of performance in cases where there is neither a Russell nor a Mellon connection.” IPE

Topics