UK - State Street Global Advisors (SSgA) has developed alternative investment models and screening methodology to counter the potential effects of the new International Financial Reporting Standards (IFRS) on its portfolio and stock selection.
IFRS, which took effect on January 1, aims to produce more consistent valuations for European companies and better transparency. However, SSgA said the effect in the short term would be greater earnings and balance sheet volatility.
The firm said it had identified the accounting variables that would be more volatile and unpredictable under the IFRS rules and developed alternative models to augment current ones during the transition period. In addition, SSgA has developed a screening methodology to identify companies that are susceptible to isolated adverse accounting changes when reporting their first set of IFRS-compliant numbers.
“We believe these screens are critical, considering we are likely to face great uncertainty regarding company result announcements,” said Susanne Willumsen, head of active equities in Europe and senior portfolio manager.
“The uncertainty stems not only from the complexity of the changes but also from a real risk that some companies may not be able to release their results on time. In our opinion, the risk is more pronounced with smaller companies, as well as companies in France, Italy and Spain.”
SSgA said it had taken a number of steps to minimise the impact of IFRS on its investment models.
When assessing a company’s relative value, SSgA will use a number of valuation metrics including “econometric techniques” to eliminate differences that arise solely as a result of IFRS. In addition, the firm has developed additional proprietary valuation models that it says are “powerful predictors of future returns”.
“We expect to run both valuation models in parallel until such a time as all earnings forecasts are produced on a consistent basis,” SSgA said.
The firm will conduct its earnings growth forecast following the same methodology as for its valuation metrics.
“We are confident we have satisfactorily addressed the issues arising from IFRS that could affect our portfolios and stock selection models in the coming year,” Willumsen said.
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