The murky world of wrap-account performance will become clearer in 2006, thanks to new reporting standards announced by the CFA Institute, the body that oversees the certified financial analyst designation.

Alecia Licata, director of investment performance standards at the Institute’s
Charlottesville, Va., head office, says the new global investment performance standards were four years in the making and will replace the performance presentation standards passed by the former Association for Investment Management and Research for separately managed accounts, or wraps, as they are frequently called.

Wraps feature a basket of investments such as stocks, bonds and mutual funds in one account, and are managed according to a pre-determined asset allocation model suited to the individual investor’s risk tolerance.

Wraps are a fast-growing financial product. According to Toronto research firm Investor
Economics Inc. , assets in SMAs have a three-year annual compound growth rate of 13.6%, compared with stand-alone mutual funds, which are growing at 1.6% a year.
However, SMAs trail mutual fund wraps in growth. High-end fund wraps, those requiring a minimum investment of $25,000, are growing at 21.9% a year on average, while mass fund wraps, those with investment thresholds less than $25,000, are growing at a 16.1% clip.

Licata says SMAs are doing well and there seems to be more growth on the horizon.

She says GIPS will bring global order to the way SMA performance is calculated and provide more transparency of performance numbers, allowing advisors and investors to compare the returns of different SMA programs, assuming the various sponsors follow the guidelines.

She notes that wraps are popular vehicles in North America, and are only catching on in Asia and Europe. As such, there are gaps in how firms calculate their overall performance.

For example, firms are inconsistent in the way they deal with considerations such as survivorship bias or the time period over which performance is calculated.

Starting Jan. 1, 2006, firms that follow GIPS, which are voluntary guidelines, will be required to disclose fee schedules detailing the charges to investors for the different SMA categories.

Like mutual funds, SMAs can be categorized according to things such as management style. So a large-cap growth account may generate different fees and returns than a small-cap value account.

Firms must also present performance on a “net-of-fees” basis, which means before they state performance, they will have to take into account all the various fees that wraps are
often criticized for charging.

Licata says this will allow a better apples-to-apples comparison of different wrap-plan sponsors.

Anna Ackerman, senior performance analyst in Toronto at IA Sciences, a firm that helps investment firms set up wrap programs and administers more than $2.5 billion in assets, welcomes the new standards.“There’s currently a lot of confusion in regard to fees and how they apply to the various accounts. It’s a big change and will benefit the end client.”
However, she adds, “it will require a lot of education.”

Licata notes that even now the help desk at the CFA Institute receives hundreds of inquiries about how to apply the [current AIMR-PPS] standards. With the new standards, she says, “We expect to get quite a few questions,” and her organization is developing a GIPS education program.

Jim Fraser, senior vice president of marketing at Mackenzie Financial Corp. in Toronto, says the changes won’t affect mutual funds, the accounts of which are priced every day.

“It’s more applicable to the true managed account,” he says, in which investors own the actual underlying securities, as opposed to programs such as Symmetry, a Mackenzie mutual fund wrap account. He says the new guidelines will require firms to modify their computer programs. “It’s a programming task. That takes a fair bit of time.”

“We recognize it takes time and resources to implement these ethical standards,” Licata adds. “But we believe they are the best practices.”

She expects the transformation will be similar to what happened when the AIMR-PPS standards were first adopted in the 1990s. IE