To: CFA Institute Global Investment Performance Standards Re: GIPS 20/20 Consultation Paper Date: 13 July 2017 Dear Sir/Madam, Thank you for the invitation to comment on the GIPS 20/20 Consultation Paper. The Securities Analysts Association of Japan, the country sponsor of the GIPS standards in Japan, is pleased to submit comments as below. Comments on the Questions Question1: Do you agree with the pillars concept? If so, should there be any other pillars? We agree with the three pillars in principle. The proposed pillars concept reflects the stated GIPS Executive Committee mission and there is no other pillar to be added. However, there are some investment schemes for which it is not clear as to how they should be categorized under three pillars. For instance, in Japan, trust banks offer a type of pooled fund for pension plan sponsors, where the investment manager has an individual, one-to-one relationship with the client and presents gross-of-fees returns in the composite presentation, although it is not a separate account but a pooled fund (not broadly distributed pooled fund as it does not fall under a criterion “There is typically no or minimal contact between the firm marketing the pooled fund and prospective pooled fund investors” in the GIPS Guidance Statement on Broadly Distributed Pooled Funds)1. Also, wrap-fee accounts/SMA for retail investors should be examined carefully as to which pillar they should belong to, while we believe it is because in most cases the manager has no knowledge of their client nor has investment management agreement but manages assets separately, a very hybrid nature of “One to one” and “One to many”. Such schemes as above (featuring more than one pillars) should also be considered and explanation should be given with respect to the pillars of “One to one” and “One to many”. Question 2: Do you agree with the proposed treatment of pooled funds? We could not agree with the proposal at this stage unless further clarification is provided on the following points: Pooled fund report: If the presentation of a pooled fund report is applied to any type of pooled fund (in addition to “broadly distributed pooled fund”), the definition of “pooled fund report” as given in the GIPS Guidance Statement on Broadly Distributed Pooled Funds (such as “official pooled fund documents” required by local regulators and “fund-specific marketing material”) is necessary. Gross-of-fees vs net-of-fees returns: As we commented under Question 1 above, there is a type of pooled fund offered by trust banks in Japan, which is marketed based on a one-to-one relationship with a client (such as a pension plan 1 In this scheme, pension plan sponsors cannot directly invest in the pooled funds offered by a trust bank, but only through a trust account opened by a plan sponsor at the trust bank who is to manage the account on a discretionary basis. Scheme wise, these are special funds where the trust bank is the trustor and trustee concurrently. The trust bank as trustor puts money from client trust accounts into these pooled funds according to individual client investment mandates, and as trustee manages the funds on a discretionary basis. | 5F, Tokyo Stock Exchange Bldg., 2-1 Nihonbashi-Kabutocho, Chuo-ku, Tokyo 103-0026, Japan sponsor) and the performance of which is presented as gross-of-fees returns. It is impossible to calculate and present net-of-fees returns for this type of pooled fund because management fees are paid outside of the pooled fund. Thus, the choice of gross-of-fees returns and/or net-of-fees returns should be given for a performance presentation of a pooled fund subject to disclosure of which are presented, gross-of-fees returns or net-of-fees returns. Closed-end pooled funds: You are proposing that firms managing any type of pooled fund would be required to present to prospective investors in those funds a pooled fund report that would include only the pooled fund’s information. However, we are afraid this means nothing for closed-end pooled funds because when such a fund is promoted anew (i.e., there are potential investors), there is no performance track record to present, and when the fund has actual track record, there would be no potential investors as the fund is already closed to new investors. So, the proposal covers open-end funds only, and we need to say something about closed-end funds. We believe prospective closed-end fund investors must receive compliant composite presentations. Composite construction for pooled funds: Regarding the proposal on composite construction for pooled funds, touching on more details seems inevitable, particularly when a new portfolio (that may or may not be a pooled fund with the same investment mandate, objective or strategy as those of an existing pooled fund) comes in and the firm must create a new composite to accommodate them together. Then there are questions: 1) Can/should/must the composite have historical track record?; 2) When a new composite includes both a pooled fund and a separate account, can NAV-based net-of-fees returns of the pooled fund be used for calculation of gross-of-fees composite returns? Or gross-of-fees returns should be calculated for the pooled fund? Question 3: Do you agree that asset-class-specific guidance should be consolidated where possible? We agree with the proposal. Question 4a: Do you agree with the proposal that firms should be allowed to choose whether to present IRRs or TWRRs for any closed-end, fixed life, fixed commitments fund where the firm controls the timing of the cash flows? We agree with the proposal. However, we are not sure what benefit firms would find in having a choice between TWRR and IRR rather than being required to present IRR only. There is a difficulty in having benchmark return for an apples-to-apples comparison with IRR composite return. The GIPS Executive Committee/Technical Committee should elaborate more on benchmark for those composites for which IRR is calculated and presented in a compliant presentation. TWRR is not always misleading even in case of closed-end funds. Question 4b: What criteria should be required for a firm to be allowed to present an IRR versus TWRR? The criteria for a firm to be allowed to present an IRR could be that the firm manages a portfolio that 1) is a closed-end pooled fund; 2) is commitment-based; and 3) has a capital call/distribution structure. Question 5a: For calculating TWRR, do you believe that valuing monthly and at the time of all large cash flow suffices? We believe that the current requirement i.e., valuing monthly and at the time of all large cash flows is appropriate from both theoretical and practical perspectives. Page 2 of 5 Question 5b: For calculating IRR, do you agree with the proposed valuation frequency for all portfolios regardless of the underlying investment or asset class? We agree with the proposal. Question 6a: Do you agree that firms should be required to provide a pooled fund report to investors in the pooled fund on an annual basis? We do not agree with the proposal. We understand that local laws or regulations require pooled funds to provide an annual (or semi-annual) report to the existing fund investors where fund performance information is most likely presented in addition to the financial statements and/or summary of investment activities and underlying investment environment (an annual or semi-annual performance report is a legal requirement for investment trusts in Japan). Although local laws or regulations may not prohibit firms from providing a pooled fund report (any definition of “pooled fund report” is not yet provided in the proposal but we understand it should include information on the pooled fund only), we wonder what benefit existing investors of a pooled fund could expect from receiving a GIPS-compliant “pooled fund report” in addition to a performance report required by regulators – it is very confusing for investors in the pooled fund. Therefore, we are very negative about feasibility as well as practicality of this proposal. (See also comments under Question 2 above for closed-end funds.) Question 6b: Do you agree that firms should be required to provide a compliant presentation to existing clients in the composite on an annual basis? We do not agree with the proposal. Firms should not be required to provide a compliant presentation to existing clients in the composite, but be required to communicate to the existing clients that a compliant presentation is available upon request for not only the composite including the client’s portfolio but also any other composites of the firm. Question 6c: Do you agree that firms should be required to make an offer to provide a composite compliant presentation or pooled fund report to existing clients or pooled fund investors on an annual basis? We do not agree with the proposal. See comments under Question 6a and 6b above. Question 7a: Do you agree with creating a new category of assets as described above? A compliant presentation should not include any information on product/strategy that the firm does not manage on actual assets on a discretionary basis. UMAs, model portfolios, and advisory-only assets should not be included in the total firm assets in a compliant presentation: they should be explained somewhere outside of a compliant presentation. Question 7b: Which assets should be included in this new category of assets (e.g., UMAs, models, overlay, and advisory-only portfolios)? We think a new category of assets should be established only for the underlying assets in overlay strategies and this category should be clearly separated from “managed” assets.