Price Performance Measurement Systems, Inc

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Price Performance Measurement Systems, Inc. (PPMS)

Start-Up Instructions

I. Initiating a new client relationship with PPMS

Complete the "New Client" screen on the PPMS website (www.PerfAT.com) in order to gain access to the performance after-tax system. The Client Short Name that you select will be associated with all of your portfolios. (e.g. it refers to you, as the client of PPMS, rather than to your investment management clients). It is case-sensitive, so be sure that you log on and enter the name consistently in your data transactions. Your full company name as input here will appear on your portfolio performance reports if you select that option. You must also indicate whether you want cash flows to be treated under the default end-of-day convention or on a start-of-day basis. A contact name, phone number and email address are required in order to start up a new relationship. The Period field is optional but may be helpful since it creates a default to use when you add additional portfolios in the future. The Data Pass Method (detailed discussion in Section IV) is important for getting your data into the PPMS system. The default is Excel but other choices include CSV, Advent Axys, Schwab Centerpiece, and Security APL. Additional automatic interfaces will be added in the future. If you choose Axys, Centerpiece, or Security APL you can change the pass method temporarily during data uploads in order to use Excel or CSV for necessary data additions (such as sub period valuations) or corrections (such as muni bond interest).

II. Required data

Calculating after-tax performance requires four types of data:

(1) the applicable tax rates for each portfolio,

(2) the valuation of the portfolio at various points in time (the major determinant of pre-tax performance),

(3) the transactions which have occurred during the measurement period, and

(4) a linkage between transaction types and their tax status.

II.A. Portfolio Set-Up including Tax Rates

The most straight forward way to set up a new portfolio including applicable tax rates is the on-screen "Add Portfolio" button. A second option, batch processing to add hundreds of portfolios at once, is discussed later. The 10-character Portfolio Short Name input here will be used to connect all valuation and transaction data and should probably be the same as used in your internal accounting system. A full name is not required if using Excel or CSV data pass methods but can be printed on reports, at your option. If using Axys, Security APL or Centerpiece, the full name MUST be identical to that printed on those reports in order to automatically link your internal accounting system to PPMS. Separate portfolio passwords are not recommended but are potentially available.

The Portfolio Type field is important because it allows the system to default to the maximum Federal and State tax rates for this type of client (pull-down menu for choices). The 2-character state abbreviation is likewise important to assure that the correct state tax is applied. The default state is "NO" for no state. If a state is selected, the current year state tax is appropriately combined (not a straight addition since state taxes are deductible for federal taxes) with the federal rates to provide the default tax rates.

Period refers to the normal calculational frequency for this client; it can be monthly, quarterly, or annually. The actual calculation will depend on the valuation data supplied and can include any number of intermediate sub periods if appropriate due to cash flow events during the period. In other words, you can supply monthly valuations but print only quarterly performance reports.

The AMT option is presently not implemented so it makes no difference what you select. If a particular portfolio is subject to AMT, you may wish to take this into account in adjusting the applicable tax rates.

The OID (Original Issue Discount) option is implemented but only in the sense that the PPMS system will correctly process any OID accretion/amortization if supplied via appropriate transactions. The AIMR PPS/GIPS recommend rather than require the inclusion of OID accretion/amortization.

The Amortization field should be checked “yes” if you wish to claim compliance with the AIMR-PPS standards. The PPMS system accepts amortized interest (for any type of security) but it must have been calculated elsewhere and included with other transactions. If you do not check “yes” for this field, then you must respond “yes” to the Cash-Basis field. Leaving both fields “no” will result in no taxes being calculated.

The Cash-Basis field indicates that this portfolio is interested in assigning taxes only based on actual receipt of dividend and interest income. This may be appropriate for individual portfolios where there is no intent to combine them in a PPS-compliant composite or for composites consisting of equity portfolios with no fixed income positions. It avoids the need to compute amortized interest and is easier to explain to your clients. If you checked “yes” for amortization, then you should answer “no” to Cash-Basis. Cash transactions may be processed for other purposes (e.g. calculation of the adjustment for non-discretionary withdrawals) even if you elect to use amortization for taxes (see page 5).

The Inception Date is optional but will be required if you wish to show comparable benchmark performance or performance from inception. Historic default tax rates will be calculated for each portfolio based on its inception date. The default is to provide historic default tax rates since 1/1/2000 if no inception date is input.

The Fully Liquidated Basis field should be left “No” unless you wish to show fully liquidated performance in addition to the standard realized basis method. Although mutual funds are required to show performance by this methodology for 1, 3, and 5 years, it has not been widely accepted for separated managed portfolios. This methodology taxes all unrealized capital gains as though they had been realized during the period, even though no sales were actually made. It is an extremely conservative method of calculating after-tax performance and may lead to distorted performance comparisons between asset classes or very active managers vs. those who are more tax aware.

The Performance Net of Fees field should be left “No” unless you wish to show your clients their performance net of management fees. If you include fees in the transaction file (TX Type “FEE”), they will be treated as a cash withdrawal in any case. However, if you check “Yes” they will also be subtracted as an expense. If you would like to show performance net of fees but the client pays fees from a separate account, they should be input as TX Type “FEEX.” Such transactions will not be treated as cash withdrawals and will only be used in the net of fee calculation.

The Amortize Fees field should be left “No” unless you have indicated that you wish to show performance net of fees and you would like to amortize fees (recommended under AIMR GIPS standards), In this case, you (or your accounting system) will have to determine the appropriate amortized values and enter them as TX Type “AFEE.” These amortized fees are not cash flows and will only affect net of fee performance. You may also include the actual payment of fees as TX Type “FEE” since these transactions will be treated only as cash flows and not be double-counted.

The Family Relationship is optional (default is “none’) but selecting “Master Total” or “Family Total” and “sub account” will allow calculation of after-tax performance for both asset level and total portfolio level or other types of aggregation. Selecting “Master Total” will do the aggregation of performance by percentage weighting the sub accounts according to start-of-period assets. This methodology is suggested by the AIMR GIPS standards for composites and is required when any of the sub portfolios have significant cash flows (which resulted in sub-period valuation and linking) or experienced non-discretionary withdrawals for which you would like to make an adjustment (because such adjustments are non-linear). Selecting “Family Total” will do the aggregation of performance by summing all of the transactions and cash flows across all the sub portfolios so that the family total portfolio performance will equal what it would have been had there been no sub portfolios. The two methods will yield exactly the same results for periods where there are no cash flows.

The Master Portfolio Name field should be left blank unless the family relationship above was input as “sub,” in which case you should input the short name of the related master portfolio.

II.B Portfolio Tax Rates

PPMS allows for eight different types of tax rates, although only seven are currently in use because the IRS has removed the mid-term capital gain holding period.

Short term capital gains	Holding period less than 1 year; ordinary income rate
Mid term capital gains	Currently unused
Long term capital gains	Holding period greater than 1 year; long term cap gain rate
Dividends	Ordinary income rate (with corporate exclusion if appropriate)
Corporate interest	Ordinary income rate
Treasury interest	Ordinary federal rate but no state tax
In-state Muni interest	No federal or state tax
Out-of-state Muni interest	No federal but ordinary state income tax

The screen will initially display default tax rates appropriate to the Portfolio Type and State earlier selected and for periods since the portfolio inception. Both current and historical rates are supplied for federal taxes (only current rates for state taxes) but all should be viewed as simply a starting point. The user is responsible for his/her own tax rate decisions, which may involve rates either higher or lower than those shown. Simply blank out the dates of historic tax rates if this portfolio is not expected to need historic analysis. These rates should be fairly constant for a given portfolio unless there is a change in tax law or the client indicates a difference in his/her tax situation. These rates can be modified later or a new effective date added in the case of a tax law change.

II.C Valuation Data

Only five items are needed for each valuation date: the Client Short Name and Portfolio Short Name specified above, the period end date (PerfDate), the Period Length in months (1,3,12), and the Portfolio Value. As noted earlier, valuation records may be included for any number of sub periods if cash flows make such linking appropriate. The Period Length should be 1 for month-end records and 0 for other sub periods. If sub periods are used, a separate sub period record must be included for the last sub period in the period (e.g. a duplicate record for month end with the Period Length equal to 0).

The Portfolio Value field should include all cash flows and income received or accrued as of the close of the date shown. Accounting systems which do not include accrued interest in their portfolio value totals will have to add such interest before importing data to PPMS. Users have the option of including accrued dividends in their valuations (required by AIMR-PPS after 1/1/2005).

PPMS supports several methods of data transfer. The default is via Excel spreadsheets. These five fields should be the first five columns in a spreadsheet, as in the attached example. Valuation data for any number of portfolios and any number of periods may be contained on the same spreadsheet. See the "Batch Operations" section below for data exchange instructions. At the user's option, fields six through nine, Unrealized Gains with a break-down by Short-term, Mid-term, and Long-term, may be included in each record. There is no tax- or performance-related requirement for doing so, but this has long been a recommendation of the AIMR-PPS and it is required if the manager wishes to calculate an adjustment for non-discretionary capital gains (see below) or after-tax performance on a fully liquidated basis (The SEC requires post-liquidation returns for mutual funds). These fields should represent the difference between the value of securities in the portfolio and their cost basis as of the period date. As such, they should not include amortized income.

If you have chosen the Axys, Security APL or Centerpiece data pass methods, you will be able to send appraisal reports from those systems as CSV files. PPMS will determine the client short name from your logon and look up the portfolio short name and date based on the report title. Portfolio value and unrealized gains will be determined from the bottom line of these reports. These methods reduce the risk of data entry errors but are a bit more cumbersome since only one portfolio and date can be transferred at a time.

II.D Transaction Data

The PPMS system supports 26 different types of transactions, which make up the most important input to calculating the impact of taxes on portfolio performance. Additional types of transactions may be included in the imported spreadsheet, just to facilitate the transfer of data from your accounting system to PPMS. However, transactions such as "BUY" or "SPLIT" will be ignored since they have no direct tax impact.

When using the Excel or CSV data pass methods, only five (or seven) items are required for each transaction: the Client Short Name and Portfolio Short Name, as specified above, the transaction (TX) type, the transaction date (TXDate), and up to three more values with either an income amount or the proceeds, cost basis, and original purchase date of a sale. The attached example includes two additional columns for security identification (IDType may be either ticker(T), cusip(C), name (N), or sedol(S)) but both may be left blank unless desired for that purpose. The Income field is required only for income-type transactions. The Shares field is optional, again used primarily for record identification. Proceeds, Cost, and PurchDate fields are required only for sale transactions. The currency field is completely optional. Note that cash flow amounts should be included as “Proceeds”, not income, and that all amount should normally be positive. For example, a withdrawal or management fee of $20,000 would be shown as “CshOut” or “FEE” with a value of 20000 in the Proceeds column (not -20000). Note also that the aggregate trading transaction types, STCG, MTCG, and LTCG should show values as “Income”, not “Proceeds”.

Supported transaction types and the associated tax rates applied are:

Trading
SELL	Sell Security - Capital Gain Tax Rate based on length of holding period and sale date
SELLFX	Sell Foreign Exchange - Short Term Capital Gain Tax Rate, regardless of holding period
SL1256	Close a Section 1256 transaction (index or futures) which requires automatic 60-40 Long Term/Short Term taxes
Income
DIV	Dividend - Dividend Tax Rate
INT	Cash basis Interest (unspecified type) - Corporate Interest Tax Rate
CINT	Cash Basis Corporate Interest - Corporate Interest Tax Rate
TINT	Cash basis Treasury Interest - Treasury Interest Tax Rate
MINT	Cash-basis Municipal Interest - Municipal Interest Tax Rate
MOINT	Cash-basis Out-of-State Muni Interest - Out-of-State Muni Interest Tax Rate
AINT	Accrued Interest (unspecified type) - Corporate Interest Tax Rate
ACINT	Accrued Corporate Interest - Corporate Interest Tax Rate
ATINT	Accrued Treasury Interest - Treasury Interest Tax Rate
AMINT	Accrued Municipal Interest - Municipal Interest Tax Rate
AMOINT	Accrued Out-of-state Municipal Interest - Out-of-state Muni Interest Tax Rate
OID	OID accretion/amortization (unspecified) - Corporate Interest Tax Rate
COID	OID accretion/amortization on corp bonds - Corporate Interest Tax Rate
TOID	OID accretion/amortization on treasury bonds - Treasury Interest Tax Rate
MOID	OID accretion/amortization on municipal bond - Municipal Interest Tax Rate
Aggregates
STCG	Aggregated short term cap gain – Short Term Cap Gain Tax
MTCG	Aggregated mid term cap gain – Mid Term Cap Gain Tax
LTCG	Aggregated long term cap gain – Long Term Cap Gain Tax
Flows
CshIn	Cash In (not taxed but required for performance calculation)
CshOut	Cash Out (not taxed but required for performance calculation)
ForTax	Withheld tax on foreign stock dividends (treat as CshOut)
FEE	Management Fee (treated as CshOut)
FEEX	Management Fee paid from external sources (used only in net of fee performance)
AFEE	Amortized Management Fee (used only in net of fee performance)
NDWD	Non Discretionary Withdrawal (Not taxed but used in Adjustment for non-discretionary capital gains)
ShrIn	Shares In (Value of shares added to portfolio; Not taxed but required for performance calculation)
ShrOut	Shares Out (Value of shares gifted or otherwise withdrawn from portfolio; Not taxed but required for performance calculation)

Important considerations:

Lumping Trading Transactions

Because all trading transactions are summed over the performance period, it makes no difference to the PPMS system if the user inputs each security sale, each tax lot, or an aggregation of all trades which are treated the same for tax purposes. If your accounting system provides such an aggregation, and you are using the CSV or Excel data pass methods, it may be simpler for you to enter the total portfolio short term realized gain as an STCG record and long term realized gain as a LTCG record rather than individual transactions. If so, be sure that the net gain or loss (as a negative) are entered in the “Income” column. If you use the Axys or Centerpiece data pass methods, all individual transactions are read and entered from the realized gain/loss reports of those systems.

Lumping Income Received

Because all similar income is summed over the performance period, it makes no difference to the PPMS system if the user inputs each stock dividend or interest payment received as a separate item or whether they are input as a single total for the portfolio at the end of the month. Do whichever is more convenient for your accounting system. This is true of all types of interest, cash basis or amortized, but not true of cash flows which must be identified by the correct date.

Definition of a Dividend

The maximum individual tax rate on corporate dividends was lowered to 15% as of January 1, 2003. However, it is important to note that the new rate applies only to “distributions by a corporation to its shareholders out of its current or accumulated earnings and profits.“ As detailed by Mark Luscombe in Taxes, The Tax Magazine, Vol. 81, No 7, this means that preferred stock dividends would not qualify if the corporation has been deducting them as an interest expense. Mutual fund dividends would qualify only if the source were corporate dividends, not money market interest. S Corporation or REIT Trust dividends would qualify only if the source was accumulated earnings from a prior C Corporation or passed through from such a corporation. Even brokerage firm substitute payments for actual corporate dividends on stock sold short might not qualify. The law also requires that the individual own the dividend paying shares for at least 60 days within a period starting 60 days before the ex-date and ending 60 days afterwards. Since PPMS has no knowledge of the specific holdings within your portfolios or how long they have been held, it is not logically possible to make the fine distinctions required by this new law. In fact, since you could conceivably purchase a stock today which declares a dividend tomorrow, it would not be possible to determine until two months from now whether that dividend was eligible for the reduced tax rate since you might sell it in between and not meet the 60 day holding requirement. In summary, we have not attempted to fine tune our tax calculation for these distinctions and leave it to our clients to properly assign the transaction code “DIV” only to those transactions which they determine are eligible for the new dividend tax rates. It will be particularly important with automatic feeds from your accounting system that you convert “DIV” items which represent money market income on cash to “INT” in order to avoid under-estimating the relevant taxes.

Amortizing Interest and Dividends

The amortized interest in transactions types AINT, ATINT, AMINT, or AMOINT is actually the difference between the total amortized interest of these types (corporate, treasury, municipal bonds) in the portfolio as of period end and the beginning of the period. Total amortized interest may change during the month due to the purchase or sale of securities which include amortized interest. If entered separately for each security, purchased interest should be included as positive income and sold interest as negative income. In the absence of trading transactions, amortized interest for a given security during the period can be calculated as principal x coupon rate x length of period (in days)/ 365. PPMS relies on the user’s accounting system to calculate amortized interest and to properly include purchased and sold interest. Although no ADIV transaction type is provided, users may elect to accrue dividend income simply by listing DIV income as of the ex-date rather than pay-date. If you use Axys or Centerpiece data pass methods, this election is automatic.

Including both Cash-basis and Accrued Interest

A portfolio which is using accrued interest accounting may, but need not, also include the actual cash basis coupon interest payments as received. The interest and taxes will not be double-counted; only one of the income accounting methods will be used, depending on the calculation basis specified for this portfolio. The primary reason for including both would be to allow for the proper calculation of the adjustment for non-discretionary capital gains (see below), which requires that cash basis income be subtracted from client withdrawals.

Unspecified Interest Income

The INT, AINT, and OID transaction types do not specify the type of fixed income interest and currently default to assuming corporate interest (ordinary income tax rates). The user's accounting system would therefore not have to separate out types of interest. The only way to assure that the proper tax rates are being applied for Treasuries and Munis is to use the correct transaction type for these holdings. If you use the Axys data pass method, you may have to make corrections to back out some INT records and re-add them as MINT or TINT, since Axys reports may not correctly distinguish between types of interest income. Please see the separate note regarding fuzzy logic used by PPMS to attempt to determine the nature of interest reported by Axys and assign municipal interest to the correct state.

Cash Flows and Gifting/Share Transfers

The CshIn and ShrIn transactions are handled identically for performance purposes, both before and after taxes. The CshOut, ShrOut, and NDWD transaction types are handled identically for pre-tax performance but NDWD is used uniquely for the after-tax adjustment. Cash flows are assumed to occur on the end of the date specified. In the cash of “significant” cash flows (sometimes defined as greater than 10% of the portfolio), it may be appropriate to revalue the portfolio as of the same date. If your internal accounting system assumes beginning of day cash flow, then the revaluation date should be for the date prior to the posted cash flow date. Note that if you use sub period valuations, the weighted cash flows printed for the full period will be much smaller than you might expect. That is because the weighting is an approximation which uses the days remaining between period end date and date of cash flow as a factor. By using sub periods, you have dramatically shortened this weighting factor (to zero if you do it for each such flow). A small value of weighted cash flows is an indication of a much more accurate calculation (see equations in Section VI below),

OID Amortization

Tax-wise, there is no difference between income characterized as ACINT or COID, or between ATINT and TOID, or between AMINT and MOID so these amortizations may be combined if it simplifies data entry. The critical difference on your internal accounting system is that OID amortization will also increase the tax basis of the bond, thus reducing any eventual capital gain. PPMS relies on users to track the tax basis of all securities.

Aggregating a Family of Related Portfolios

A “family” of related portfolios may consist of the sub portfolios of separate family members, the asset-level portfolios (stocks, bonds, cash) of the same person, or any other type or group of portfolios for which you would like to create a total performance record. All of the transaction data must be input for one of the sub portfolios (which must be designated as “sub” on the portfolio maintenance screen and must be linked to a “master” or “family” total by indicating the short name of such total portfolio). No valuation or transaction data should be input for the total, but it must be “created” in the sense of giving it a name, description, and particularly identifying it (in the portfolio maintenance screen) as either a “Master Total” or “Family Total.” Selecting “Master Total” will do the aggregation of performance by percentage weighting the sub accounts according to start-of-period assets. This methodology is suggested by the AIMR GIPS standards for composites and is required when any of the sub portfolios have significant cash flows (which resulted in sub-period valuation and linking) or experienced non-discretionary withdrawals for which you would like to make an adjustment (because such adjustments are non-linear). Selecting “Family Total” will do the aggregation of performance by summing all of the transactions and cash flows across all the sub portfolios so that the family total portfolio performance will equal what it would have been had there been no sub portfolios. The two methods will yield exactly the same results for periods where there are no cash flows.

Data Transfer

If you have chosen the Excel or CSV data pass methods, transaction data, including any optional fields should be the first 11 columns in a spreadsheet, as in the attached example. Transaction data for any number of portfolios and any number of periods may be contained on the same spreadsheet or CSV file. See the "Batch Operations" section below for data exchange instructions.

III. Using the PPMS After-Tax System

Once your portfolios are set up and the required data in place, using the PPMS system at www.PerfAT.com is both fast and straight-forward. Simply log on as a registered user with your password, click "Calculate Performance" and select the portfolio you wish to see. The resulting report may be printed on any standard computer, and the internet-based format makes it platform independent. Click BACK in your browser to return to the prior menu and select a different month, quarter, or a full year. Performance is actually recalculated on the fly based on your data to allow for any on-line transactions or valuation maintenance that you might require. Sample output, reprinted below, shows the application of maximum individual tax rates to a portfolio based in California with various types of income and capital gain transactions. All of the output data on these reports are actually stored in the valuation records for your portfolios, including any mid-period valuation records. This makes possible more detailed exploration of how the calculation was made in the event of client or verifier questions.

Maintenance (Checking and correcting data errors)

Clients and Portfolios -- From the Main Menu, click on the Account Maintenance button to add a new portfolio, edit or delete existing portfolios, including tax rates or edit your client record. The Main Menu button brings you back to either batch operations, calculating performance or maintenance. "Home" brings you back to the first page, at which point you will have to log in again.

Valuation – From the Main Menu, click on View Valuation. Select the portfolio and dates between which you would like to see valuation input (which will include the performance output as well). Because each portfolio can have only a single value at period end, PPMS was designed to allow automatic maintenance of valuation records. Simply re-import a valuation file, whether in Excel, CSV, Axys, or Centerpiece formats with corrected values. The new Value fields and associated unrealized gains will simply override the old ones. This also allows for recalculation with sub period valuation by adding all of the sub periods including the one prior to month end together with a new month end record.

Transactions – From the Main Menu, click on View Transactions. Select the portfolio and dates between which you would like to see transactions. Because it is quite possible for a portfolio to have multiple transactions involving the same security on the same date, it is not possible to apply the same automatic override capability. Instead, erroneous transactions should be backed out by (1) changing your data pass method to Excel or CSV, (2) reading in a spreadsheet with the reverse of the incorrect transaction (i.e. a negative dividend, interest, or cash flow to back out the earlier positive one), (3) entering the correct transaction. Steps (2) and (3) may be contained in the same spreadsheet or CSV file. Don’t forget to then change the data pass method back to your normal method. Newly discovered transactions including cash flows can always be added via a new spreadsheet and performance recalculated.

Taxes – In the case of periodic federal or state changes to the eight investment tax rates, PPMS will enter a new default tax record for each affected entity (individual, corporation, NDT, etc.). Users can access and append these revised default rates or modify them as appropriate to individual portfolios via the “Edit Portfolio, Add Tax Rate” capability under maintenance. Such revised tax rates will not be effective automatically on your portfolios because PPMS feels it important for users to be aware of such changes and have the opportunity to input “anticipated rates” as opposed to simply using the defaults, even though these will be appropriately adjusted for current state tax rates.

IV. Exchanging Data with PPMS

The Batch Operations button on the main menu allows users to import portfolio, transaction and valuation data to PPMS and export performance results back to their home systems by using customized sub-directories and ASP Simple Upload, a protocol similar to FTP. Although batches of new portfolios can be created only via Excel spreadsheets, transaction and valuation data may be imported via several different interfaces, depending on your accounting system(s). Please see the separate .pdf files for sample reports used in these interfaces.

In the case of creating or adding multiple portfolios at once, the user should enter (or download from his/her home system) all of the required fields for each new portfolio to a spreadsheet. The spreadsheet can reside in any directory on the user side and PPMS need have no direct access to it. Instead, the user simply enters the filename to be transferred (or Browses to locate it) and clicks "Import New Portfolios" to send the file automatically to their custom sub-directory on the PPMS server. Once there, the procedure will, at the same time, assign appropriate tax rates based on the Portfolio Type and State specified in each record. Users will then have the opportunity to go back and modify any tax rates or other data if necessary.

In the case of transaction and valuation data, the process will depend on the data pass method chosen. If Excel or CSV, the user should enter (or download from his/her home system) all of the required transaction fields to an Excel spreadsheet or CSV file named as you wish, with the first row reserved for headings. All of the required valuation data should be entered or downloaded to a second spreadsheet. Both spreadsheets must be the first sheets in their respective workbooks. They can reside in any directory on the user side and PPMS need have no direct access to them. Instead, the user simply enters the filename (or Browses to find it) and clicks the "Import Transaction/Valuation Data" button to send the files to their custom sub-directory on PPMS (invisible to the user). Note that the Transaction file name must be given first, followed by the Valuation file. If only transaction data is being entered, simply leave the second answer blank. No valuation file will be processed but the transaction data will have already been accepted. In this case, there is no automatic recalculation of performance, so you should click on “Calculate Performance” for the months you want to change. If only valuation data is being entered, click on the separate “Import Valuation Only” button. If your data pass method is set to one option for transaction reports, e.g. Advent AXYS, but you want to use a different interface for valuations, simply change the pass method on the batch operations screen at the time of uploading. This will cause PPMS to expect a file in the specified format for this upload only; the default will remain as you had originally established it.

Once the new valuation file is read, the procedure will automatically update your portfolios' transactions and valuation(s). It will at the same time calculate before- and after-tax performance for each of the portfolios and each of the time periods specified. Importantly, if you have repeated any valuation periods from prior uploads, the new ones will automatically replace the old, thus allowing for any required valuation maintenance and performance recalculation. However, this is not true of transactions. All transactions in the file will be added to your data (since it is quite possible to have multiple transactions of the same type and even the same ticker on the same date), so BE SURE THAT YOU DO NOT INADVERTENTLY CREATE DUPLICATE TRANSACTIONS; ALWAYS START WITH A CLEAN SPREADSHEET FILE.

The Excel interface determines the data type of each column based on the content of the first eight rows of each spreadsheet. Therefore, be sure to fill all columns of the first eight rows with zeros, even if the data is not required. Leaving blanks for “Income”, “Proceeds”, “Cost” or “PurchDate” on these rows may invalidate later transactions in the same spreadsheet.

BE SURE THAT YOUR CURSOR IS NOT LEFT BELOW THE ACTUAL DATA SECTION OF SUCH SPREADSHEETS WHEN THEY ARE CREATED OR IT MAY CAUSE A READ ERROR BECAUSE THE READING PROGRAM THINKS THERE IS MORE DATA THAN ACTUALLY WAS SENT.

The CSV interface does not have this data recognition problem, but commas are required for all fields.

The Advent Axys and Schwab Centerpiece accounting systems produce three reports which can be directly fed into PPMS. PPMS actually makes provision for two types of Axys interface, the first for equity portfolios, the second for fixed income which includes a column for accrued interest. Make sure you select the interface appropriate to your portfolios. First run the reports on your accounting system for a single portfolio and time period, saving them as separate CSV files. Then, enter the name of the Recognized Gains/Losses report in response to the first PPMS batch upload query (trading transactions), the name of the Cash Account/Income report as the second (income transactions), and the name of the Appraisal report as the third (valuation). If you inadvertently use a different order, do not repeat a transaction file; just start over at the batch upload point and add the remaining file; then use the separate Import Valuation button to upload the third file. You may find it more convenient to use the Axys reports for transactions (both types) but switch to Excel for valuation uploads since the later will enable you to enter numerous portfolios for any number of time periods in a single report and avoid the need to run separate appraisals for each portfolio and each period.

The Security APL Checkfree accounting system produces two fixed format files which can be directly fed into PPMS. The first contains all transactions, both income and cash flows. The second contains valuations. Both files can be created for multiple periods and multiple portfolios at once, and PPMS can read all of the data at once, so it is fairly quick to add large amounts of data.

Performance data can be exported back to the user's home system as soon as transaction and valuation data have been received (since performance calculation is done automatically upon receipt). Simply click the "Export Performance Data" button under "Batch Operations" on the main PPMS menu to export valuation, summary income and cash flows, summary taxes, and final calculated pre-tax and after-tax performance for each of your portfolios to an Excel spreadsheet. The performance data will first appear on your screen (in the same format as stored on PPMS). The user must click FILE SAVE AS WEBPAGE and give it a filename and location on your computer. Then open Microsoft EXCEL and click FILE OPEN, making sure that the browser looks for the file type "Web Page". Once the performance data pops up in Excel, you can save it as a normal Excel or CSV file, perform further calculations for presentation, or download it to your in-house performance system. A sample output spreadsheet is attached. All of the data contained on the PPMS performance report is also in this spreadsheet so users can customize their after-tax reports as desired, create portfolio composites by utilizing other software systems, add graphics or print on specially designed paper.

Performance Comparisons: If you are attempting to reconcile the pre-tax performance from PPMS with that calculated by your internal accounting system, you should make every attempt to assure that all of the same procedures are being followed in both places – (1) that all transactions including cash flows have been entered both places, (2) that you have selected the correct convention for cash flow timing (start of day vs. end of day), and (3) that sub period revaluations are done on the same dates (no more and no less). In general, the use of more revaluation periods creates a better approximation to performance but some systems may only revalue when the flow is more than 10% of portfolio value.

V. Advanced Data Exchange (FTP)

For clients with large amounts of data to regularly import/export, PPMS has implemented an FTP capability. Each such client will have their own sub-directory. After FTPing the two standard transactions and valuation files to their sub directory, perhaps automatically at month end, the client will trigger PPMS to process these files by starting a separate web page (not the normal perfat.com page). At the conclusion of such processing, PPMS will provide two output files in the same directory, one with resulting performance data, the other an error file which lists any errors during processing with sufficient explanation (including record numbers) to enable the user to make corrections and reprocess those portfolios and periods in the normal manner. It is suggested that the input file names include the date in order for the client to keep track.

VI. Adjustment for Non-Discretionary Capital Gains

The AIMR-PPS Implementation Committee, through their Sub-Committee on After-Tax Portfolios in 1994, recognized that in order to create fair and comparable composites of portfolio performance on an after-tax basis, investment managers should have the option to adjust performance for capital gain taxes which were created by client withdrawals, not as a result of the manager's own investment decisions. The committee wanted to assure that managers could not game such an adjustment and would continue to make decisions in a manner favorable to the client, so this adjustment does not focus on whatever gains the manager actually realized in a given period. Rather the adjustment is based on the ratio of gains which would have been available, the amount of the client's withdrawal, and the applicable capital gain tax rate.

PPMS implements this option by computing a gain ratio equal to the realized gains during the period plus unrealized gains at the end of the period divided by net client withdrawals plus ending portfolio value. Realized gains are already computed as part of the after-tax calculation, but Unrealized Gains cannot be computed from the information available to PPMS unless the user includes this field in the valuation record (optional sixth field mentioned above). Net client withdrawals start with the amount of "non-discretionary withdrawals" (transaction type NDWD), summed over the period. This gross non-discretionary withdrawal is reduced by the amount of any positive cashflows into the portfolio plus cash-basis income from dividends or interest. The existence of a NDWD transaction record automatically triggers this adjustment calculation. An incorrect (particularly zero) value for Unrealized Capital Gains will significantly reduce the Gain Ratio and therefore the adjustment to performance.

The final adjustment is the net client withdrawal x long term capital gain tax rate x gain ratio. It was the intent of the PPS Committee that this adjustment would only be positive, i.e. would add implied taxes back to performance since they were created due to actions of the client. PPMS thus assures that the adjustment will never be negative (as it might otherwise be if the account started with large unrealized losses). In the form of equations,

AdjustedAftertaxReturn = PretaxReturn - TaxBurden + Adjustment

where

and

Adjustment =

The average invested assets (sometimes called "weighted average assets") is equal to the start-of-period portfolio value plus the sum of (cash flows x number of days remaining in the period). This is a standard approximation methodology attributed to Peter Dietz.

The net affect is that if a manager is able to meet a client's withdrawal by selling higher cost assets or taking money from existing cash (thereby holding realized capital gains below the average which might have been expected), then the adjusted after-tax-performance will be higher than without the adjustment. If the manager sells low-cost assets or realizes short term capital gains when long-term gains were available, the adjustment factor will be much smaller or even zero because he has not minimized the client's tax hit while meeting the withdrawal.

VII. Error Messages

The following are possible error messages and suggested corrections:

Unregistered Client – The probable cause is an inadvertent misspelling of the first field of the transaction or valuation CSV files or Excel spreadsheets. The client short name, as you created it when setting up your new client, is case-sensitive. Be sure that you log on and enter the name consistently in your data transactions, i.e. abc is not the same as ABC.
Client License not Paid – Account trial period has expired or your service subscription has lapsed. Please call to renew.
Client Has Too Many Portfolios – Your service subscription is based on an expected number of portfolios. Please call to increase this number.
Non-existent Portfolio – The probable cause is an inadvertent misspelling of the second field of the transaction or valuation CSV files or Excel spreadsheets. The portfolio short name, as you created it when setting up the portfolio, is case-sensitive. Be sure that you enter the name consistently in your data transactions, i.e. abc is not the same as ABC. This error may be an indirect result and follow Error Message 1, since an incorrect spelling of the client short name would lead to non-existent portfolios for that client.
Non-existent Transaction Type – The probable cause is an inadvertent misspelling of the TxType field in the transaction CSV file or Excel spreadsheet. Check the list of allowed transactions in Section II.D above.
TX Purchase Date outside reasonable range – A purchase date is required for “SELL” type transactions, since it is impossible to determine if the capital gain is long or short term without it. The date field cannot be null or earlier than 1/1/1950 or later than today’s date. This error may result from not putting zeros in this column in the first eight rows of an Excel spreadsheet. Note the instructions for Excel in Section IV above.
Transaction Date outside reasonable range – A transaction date is required for all transactions. It must be no earlier than 1/1/1950 or later than today’s date.
Missing Cost Basis – A “SELL” transaction must have an associated cost basis. If you don’t know, make it zero but it cannot be left null. This error may result from not putting zeros in this column in the first eight rows of an Excel spreadsheet. Note the instructions for Excel in Section IV above.
Invalid Time Period (PerfIndic) – Valuation records must include the time period for which performance will be calculated. This field must be 0 for sub periods; 1 for monthly; 3 for quarterly; or 12 for annual. Duplicate records are required when the same date valuation is being used as both the end of a sub period and a full period.
Valuation Date outside reasonable range – A valuation date is required for all valuation/performance records. It must be no earlier than 1/1/1950 or latere than today’s date.
Month-end Record has non month-end date – A valuation record with period indicated = 1 must have an actual month end date. Check that you have used the proper 30 or 31 or 28 (or 29 if the year was a leap year), regardless if that date happened to have fallen on a weekend.
Invalid Portfolio Full Name – When using any of the accounting system interfaces, the full name of the portfolio is used to link accounting system data to PPMS. Therefore, the correct full name must be used when setting up the portfolio.
Missing Proceeds – required for this type of transaction -- A proceeds value is required for cash flow, tax withholding, and sale transactions of all types. Check that you have not put this value into the ‘income’ column rather than the ‘proceeds’ column if using Excel spreadsheets.