These firms provide the portfolio management service but have neither any knowledge of the end investor nor any transaction history on which to make this calculation.
The solution has been that platforms, who are the source of truth for this information, run the calculations on a daily basis to detect where any reportable incidents have occurred and initiate the reporting process.
Many discretionary management companies are also monitoring this at model level and are assuming an investor is invested for the whole period without introducing or withdrawing capital.
Importantly, this doesn’t reflect genuine investor behaviour so these results compared to actual client performance can vary significantly.
Who Communicates to the Client
Another complexity is around who actually communicates to the end investor.
Clearly advisers own the relationship with any advised propositions and it is through this channel that reporting is generally performed. Some platforms have made a decision to initiate this reporting directly to the end investor but this stance is in the minority.
The Calculation Method
Whilst it sounds pretty simple, running the 10 per cent depreciation calculation over a portfolio has many tricky edge-cases that are often not considered in the industry.
Firstly, a client’s portfolio may contain assets within the model but may also contain assets held independently to the model (either through choice, through Closed funds that are unable to sell, etc).
If assets are outside of the discretionary pool being managed then they should be excluded from the calculation.
Second, a client may move between models and even between model managers within a three month period.
Any performance under one manager should not count towards the 10 per cent depreciation reporting under the new manager.
It is imperative that historical movements between portfolios are considered.
The money weighted calculation method is another point of contention across the industry.
Some argue that the industry uses time weighted returns and that this calculation method should be used.
Time weighted calculation methods are used for standardised reporting of performance of investments to allow performance to be compared between financial instruments (GIPS).
This method removes any impact of capital movements in an investor’s portfolio and focuses on the performance of the manager.
Clearly this regulation has been introduced for the purpose of investor protection and is specifically intended to reflect the performance experienced of the end investor.
That is why the ESMA guidance incorporates the notion of accounting for investor specific capital movements.
Reporting Triggers
Reporting triggers can be complex.
When a portfolio breaks through the 10 per cent loss tier, it must be immediately reported.
