Meet the Micronesia GIPS® Standards Sponsor
Eddie Chan, CFA, CIPM, Director, Professional Conduct Enforcement, and Global Industry Standards, APAC, recently interviewed Daniel A. Roland, CIMA, AIFA, MBA, executive director of the Asia Pacific Association for Fiduciary Studies (APAFS). The association is our Global Investment Performance Standards (GIPS®) Sponsor located in Guam, covering the Micronesia region. A not-for-profit educational and charitable association founded in 2000 for and by representatives from public and private institutional funds from around the Asia Pacific Region, APAFS became the GIPS Standards Sponsor for Micronesia in 2006. APAFS was the 27th GIPS Standards Sponsor to partner with CFA Institute.
CFA Institute greatly appreciates APAFS’s ongoing efforts to promote the GIPS standards in these markets and territories. The impact of the association’s work reaches far beyond the physical boundaries of these beautiful islands. Read on to learn more.
How would you describe the landscape of the asset management industry in Micronesia?
The asset management industry in Micronesia is currently dominated by US-based SEC-registered investment advisers. These firms tend to be larger, with the resources to service our region, many from offices based in Asia. With the inclusion of a GIPS standards compliance requirement by most institutional investors, all these firms, that I am aware of, currently claim compliance with the GIPS standards.
Given the relatively modest pool of investable assets and smaller populations in the various jurisdictions, the domestic asset manager pool is quite small but has been growing. The domestic firms tend to be part of local or regional banks that provide such services but not as a primary business; instead, they focus mainly on their retail client base. None of the domestic firms claim compliance with the GIPS standards at this point.
What is the size of these markets and how many asset management firms are actively serving clients in these markets?
Micronesia consists of the Territory of Guam, Commonwealth of the Northern Mariana Islands, Republic of Palau, Federated States of Micronesia, and Republic of the Marshall Islands. Most of the region was, until the late 1980s, an UN-mandated Trust Territory of the United States.
In the aggregate geographic area, it consists of 2,000 islands scattered over 3 million square miles. Although very large geographically, the total population for the entire region is less than 500,000. Privately-held investment pools are unknown, but an estimate of total assets represented by APAFS membership and other public funds would likely approximate $5 billion.
An estimate of the number of asset managers that actively serve clients in our region is difficult to pinpoint, as many individual investors access mutual funds online. An estimate for the institutional fund market would be somewhere around 50 firms.
How do these firms differentiate themselves from their peers and competition?
Most asset management firms are retained through a request for proposal (RFP) process, which covers the standard metrics, such as organization, process, and performance. One major differentiator, given our remote location, is the level of client service offered.
Who are the major asset owners in your markets?
The major asset owners are sovereign wealth funds, public employee retirement funds, national social security funds, and endowments and foundations.
When did APAFS stipulate the requirement that all the RFPs issued by its member firms will require all bidders to be GIPS compliant?
In August 2007, APAFS membership passed a resolution to “support the adoption of GIPS standards as they apply to the consideration of prospective investment advisers. Therefore, all current and future APAFS members will hereto forward commit to presenting the standards to their respective decision-making authorities for inclusion in each institution’s investment policy.”
What prompted that decision?
Our region, because of its remoteness, has had a history of attracting what we refer to as “unscrupulous opportunists.” In some cases, they are asset managers, but in other cases, they are nothing more than con artists. The commonality is that they travel through the region with the intent of attracting funds from less sophisticated investors or boards through exaggerated claims of performance, striking friendships with centers of influence, and worse.
APAFS was founded in 2000 with the express mission to raise the bar of fiduciary standards of practice. Becoming a GIPS Standards Sponsor in 2006 was a major underpinning of this effort. The 2007 APAFS adoption of the requirement of GIPS standards compliance has provided an additional firewall to protect funds, public funds in particular, in the selection of asset managers.
How was this requirement received among the asset management firms?
For the preponderance of asset management firms managing funds in our region, most of which are based in the United States, it was well-received, as they already claimed compliance with the GIPS standards. For a few smaller firms based in the region, who were not able to claim compliance, it was less well-received. The accommodation was reached, in most cases, by including a grandfather clause for existing relationships and a grace period in which to become GIPS compliant.
What benefits have you and other asset owners seen from this requirement?
It allows our asset owner members the ability to fairly compare asset management firms and strategies. More important, it has provided a firewall that makes it all but impossible for unscrupulous firms or individuals to get their foot in the door as asset managers with our membership through other means, such as taking advantage of less sophisticated investors and boards through exaggerated claims of performance, unethical business practices, and other misconduct.
Is this GIPS-compliance requirement uniformly applied to asset managers of alternative investments as well as managers of traditional investments?
Since the effective date of the 2012 Guidance Statement on Alternatives Investment Strategies and Structures, it has been APAFS’s position that the GIPS-compliance requirement is applied uniformly to both traditional and alternative asset managers.
How have the GIPS standards helped promote APAFS’s mission in Micronesia?
APAFS was founded in 2000 with the express mission to raise the bar of fiduciary standards of practice in our region. Becoming a GIPS Standards Sponsor in 2006 raised the bar of APAFS value to our asset owner membership, local regulators, and other stakeholders responsible for the oversight of investment funds in our region. The GIPS standards raise the bar for performance presentations by asset managers, which in turn increases consistency and transparency, and comparability of these results. The GIPS standards address the potential problems with some asset managers cherry-picking what looks best on their report cards. Meanwhile, for firms claiming compliance with the GIPS standards, these managers must present their performance according to a set of global best practices, therefore eliminating this type of tricks-up-their-sleeves practice. This also helps the jobs of the fiduciaries, enabling them to make better-informed decisions on behalf of their clients, and protecting the interests of the beneficiaries of the accounts.
The promotion of the GIPS standards aligns well with our larger mission, which is to serve as an active proponent for our asset owner membership in other ways, such as advancing the inclusion of responsible investment in investment processes. In fact, for this effort, we were selected by the UN Principles for Responsible Investment as a “Network Supporter.” With our membership jurisdiction being composed mainly of low-lying small island nations, environmental, social, and governance (ESG) issues are the major topic of our current focus.
Are there any issues, or trends, in Micronesia, where the GIPS standards are able to address and help fulfill that mission?
For large investors, GIPS-compliant firms will be required to report their investment performance following a set of robust policies and practices, therefore removing the uncertainty or lack of transparency or consistency when comparing their performance results. This is tremendously helpful for investors and asset owners in Micronesia because they can focus on other pressing issues in this area.
APAFS represents island nations that in aggregate consist of 2,000 islands scattered over 3 million square miles of the Pacific. The islands are not large, with many being low-lying or atolls. As such, they have incredibly beautiful — but fragile — ecosystems, which are on the front lines of the challenges of climate change. Therefore, the major existential issue that Micronesia faces is true ecological extinction.
The major trend that has been developing in our region over the past few years is the realization that asset owners need to incorporate ESG data in their investment process to do their part in addressing the ecological damage being done. To that end, APAFS recently partnered with UN PRI as a “Network Supporter” to advance the inclusion of responsible investment in the investment processes.
APAFS is aware that CFA Institute encourages the incorporation of ESG. Therefore, while perhaps not specific to GIPS standards per se, obtaining assistance in educating local regulators, asset owners, and other stakeholders of the need for, and benefit of, similar standardization of data and disclosures would be very helpful. At present, none of our membership jurisdictions require any level of ESG reporting or disclosure from companies to investors with regard to ESG-related information.
We received additional feedback from two members of the APAFS Board of Governors.
What benefits do you think asset-owner members of APAFS will realize in adopting the GIPS standards themselves?
“To date, none of our asset owner members have taken the step of adopting GIPS standards themselves. For most, it is a matter of educating, and convincing, asset owner boards of the value of doing so, versus the time and cost to achieve and maintain compliance. None of our members doubt the intrinsic value of doing so, as is evidenced by the requirement of compliance on the part of their asset managers.
The main benefits of adopting the GIPS standards themselves would be to indicate the commitment to adhere to the highest ethical principles and global best practices for the reporting of investment performance to their stakeholders. Further, the actual process of attaining and maintaining compliance would provide an opportunity to adopt, and revise when needed, robust policies, procedures, and controls. It would also provide continuity to future board members.
Finally, with the preponderance of our asset owner members being public benefit funds, national retirement schemes, and endowments, all of which are subject to oversight by a variety of stakeholders, to include regulators, legislators, and donors, achieving compliance with a globally recognized standard would add a high degree of credibility to fund reporting and, by reflection, the board itself.”
– Gerard A. Cruz, AIFA®, Chair, APAFS Board of Governors and Chair, Finance Committee, Board of Trustees, GovGuam Employees Retirement Fund
If there is one thing you would highlight from the GIPS standards for Asset Owners, what would you tell them?
“Based on the principles of full disclosure and fair presentation, the GIPS standards will allow them, as it has with the MPLT Board of Trustees, to perform higher quality investment manager due diligence. Most important, in our geographically remote region of the world, incorporating GIPS standards compliance as a requirement in manager searches will help reduce the likelihood of making a bad asset manager hiring decision.”
– Martin B. Ada, AIFA®, Chairman, Board of Trustees, Marianas Public Land Trust
Image Credit @ CFA Institute