Key Takeaways from the 2023 PMAR Conference

TSG hosted the 21^st annual Performance Measurement, Attribution & Risk (PMAR) North America Conference on May 24^th – 25^th 2023 in New Brunswick, New Jersey. Longs Peak had the pleasure of sponsoring the event and being represented on the Performance Reporting: Beyond GIPS panel on day 2 of the conference by our very own Matt Deatherage, CFA, CIPM.

With many unanswered questions still circulating on the implementation of the SEC Marketing Rule that took effect last November, there were multiple sessions that touched on this topic. Other topics included ESG and its impact on performance, maximizing the potential of AI, performance evaluation and risk when returns aren’t normally distributed, evaluating benchmark misfit risk, and other hot topics such as talent retention and outsourcing.

With many women in the industry already attending PMAR, the conference also facilitated the first in-person Women in Performance Measurement (WiPM) meeting May 23^rd. Longs Peak co-sponsored this event with TSG and sent four members of our team to the event. Interacting with so many brilliant women in different stages of their careers was a great experience, and the women of Longs Peak are looking forward to being part of the continued growth and development of the group.

ESG

ESG reporting requirements are ramping up, coming from pressure from shareholders and employees as well as in response to looming federal climate-disclosure regulations. The trend is no different for prospective investors as interest in ESG information is increasingly being requested by prospects. According to this WSJ article, “Nearly 80% of roughly 400 global institutional investors surveyed last year said companies should make investments that address ESG issues, even if doing so reduces profits in the short term.” The speaker reiterated this sentiment and said although the regulations in the US are behind Europe and Australia, he said that the SEC is getting there.

AI and Machine Learning in Investment Management

It is no secret that large language models (LLMs) like ChatGPT or BloombergGPT are increasingly being incorporated in investment management. LLMs offer powerful technologies that can be utilized for a variety of advancements from data analysis and research to providing valuable insights from financial reports and supporting decision-making. In addition, they can contribute to risk assessment, compliance, and portfolio management by analyzing data and optimizing strategies. It is our opinion that this technology will revolutionize the financial services industry and will do so rapidly.

Of course, the integration of AI and Machine Learning technology comes with advantages and disadvantages. While the technologies offer improved efficiency and accuracy, relying too heavily on this technology can introduce algorithmic biases that can impact investment decisions. As performance experts, we wonder if it will create an overreliance on historical data and as we know, past performance may not always be indicative of future results. Key takeaways from this session were to consider how your firm might utilize LLMs and Machine Learning in your own processes and that while this technology is still somewhat new, it is increasingly accessible to anyone at reasonable cost.

Performance Reporting: Beyond GIPS

The panel discussed the types and frequency of performance they’re seeing internally and externally. Depending on the asset class, monthly or quarterly external reporting is most common, while some portfolio managers have found value in utilizing daily reporting internally to see how their strategies are performing in real-time. Firms seem to be steering away from manual updates and relying more heavily on automation and external resources for reporting. Beyond the statistics required by the SEC, including visuals in their reports was touched on by the panel as well as focusing on the story the firm is looking to tell based on the goals of the specific strategy.

Firms distributing performance also need to consider the internal controls needed to ensure that they are presenting accurate performance relevant to the specific audience. The importance of audit logs and extensive internal review was stressed, and firms are constantly looking for ways to improve these processes and save time. These challenges extend to updating databases in a timely and efficient manner, with some firms opting to upload preliminary performance to meet database deadlines and then making retrospective changes as needed.

While Excel is still king in the performance world, utilizing performance systems for calculation and reporting can create efficiencies and reduce opportunity for manual error. Flexibility is key, as end users want to be able to customize reporting for their specific needs. The ultimate reporting goal for many firms seems to be aggregating performance and risk statistics from different sources, and firms have found success using dashboards and other technology to simplify these processes.

SEC Insights

With many of our clients being SEC-registered investment firms, we’ve been just as eager as the rest of the industry for additional guidance on the SEC Marketing Rule. Unfortunately, it sounds like it may be a while until additional FAQs are released. One requirement that has raised many questions is the requirement to present performance net-of-fees. “Performance” isn’t defined by the SEC, so the PMAR panel, focused on extracted performance and attribution, attempted to shed some light on what could be considered performance under the new SEC guidelines.

It’s been made clear that the net performance requirement applies not only to performance of an entire composite or portfolio, but also to that of a subset of investments or a single investment. If the gross performance of a single investment is shown, net performance also needs to be presented. When presenting extracted performance, firms should apply a model fee to calculate the net return, include appropriate disclosures, and be able to support why they’re presenting this information.

This gets a little trickier when considering attribution, and many firms are still figuring out how to navigate this grey area. The SEC will likely want to see attribution net-of-fees in some cases but not others. For now, it seems providing clear documentation for what’s shown and why is key. According to the panel, things like average weight and Sharpe ratio seem less likely to be considered performance, while contribution to return seems more likely to be considered performance. Yield in particular was discussed in detail, with the takeaway being that if yield is presented in a way that it is synonymous with a return and what investors can expect to take home, this may be subject to the net performance requirement.

Some other takeaways from this panel discussion on attribution are that metrics derived from performance and those that are relative to a benchmark are less likely to be considered performance in the eyes of the SEC. Firms should be able to support their decision of what they consider performance and be aware of the context in which attribution is being presented.

This panel also touched on key deficiencies from recent SEC exams, as well as what to expect for the next round of exams. While Phase I focused on more evaluating whether firms were addressing the new rule, Phase II is expected to include a deep dive across 175-200 firms. This will also include 20-25 exams involving recalculation of performance, as well as a focus on predecessor performance and testimonials/endorsements.

Some of the deficiencies the panel touched on from Phase I were material misstatements in advertisements, manipulation of performance, omitting poor performance, and failure to present net-of-fee performance. Another deficiency noted was the lack of policies and procedures around presenting hypothetical performance. The key to presenting hypothetical performance is that recipients must be able to fully understand what is being shown, and that this performance is not being distributed to a retail audience. You also need to have the ability to recreate any hypothetical performance presented, as this has the potential to be tested by the SEC.

To get ready for the next phase of SEC exams, firms should make sure their policies and procedures are designed to prevent violations of the marketing rule and that their marketing materials comply. We recommend extending this review to your website to ensure historical information published prior to adoption of the new rule is also in compliance. One suggestion from the panel was to leverage other firms in the industry to see what types of disclosures are being used. Many large firms are putting a lot of time and resources into navigating the marketing rule, so leveraging these firms as best practice is encouraged.

WiPM Group

Officially launched in late 2022, the Women in Performance Measurement (WiPM) Group was developed as a resource for women in the investment performance industry to connect with, learn from, and uplift one another. With initial members of the group spread across multiple regions and countries, the first in-person meeting had an impressive turnout of over 50 attendees.

The meeting featured Lisa Kaplowitz as its keynote speaker. Kaplowitz is a professor at Rutgers Business School and is the Executive Director at Rutgers Center for Women in Business. Her background includes everything from taking part in the landmark Title IX case to multiple CFO positions. Throughout her career, Kaplowitz has remained a champion of women and challenging the status quo.

Kaplowitz shared statistics supporting that the majority of women in C-suite positions competed in athletics, with nearly half of those executives being previous college-level athletes. This connection may not be all that surprising when you consider the life lessons around discipline, resiliency, and teamwork that are taught through athletics and the valuable leadership skills that are developed through those experiences. She also offered some insightful information on maladaptations women have to endure to survive in the workforce today and offered suggestions for addressing them. This topic really seemed to resonate with the group.

Another topic discussed was how to make the workplace “work” for women, which led to some insightful conversations during the WiPM panel discussion that touched on work life balance and the unique challenges women face in the workforce, particularly the performance measurement industry.

The group is working out details of a mentorship program that will help facilitate relationships between women across the industry and allow them to share the knowledge and experience gained throughout their careers. This program is expected to launch in the fall of 2023 and is open to all women within the WiPM group.

Anyone interested in the WiPM Group is encouraged to contact us to get connected or to submit an inquiry directly to the WiPM Group here.

Conclusion

This year’s PMAR speakers offered a lot of great insights on topics related to investment performance measurement and challenges facing the industry.

We enjoyed connecting with other performance measurement professionals in-person and are looking forward to attending future PMAR and WiPM events.

If you have any questions about the 2023 PMAR Conference topics or GIPS and performance in general, please contact us.