Global Investment Performance Standards (GIPS)

Global Investment Performance Standards (GIPS) are considered ethical best practice in investment management. While not mandatory, there are benefits to choosing GIPS compliance.

What is GIPS?

Prior to 1999, investments were difficult to compare. Country-specific guidelines complicated the manner in which investment performances were evaluated. As globalization became the way of the future, the need for standardization was realized. The groundwork for the global standard was laid in 1987 by AIMR’s Performance Presentation Standards, originally adopted as the guidelines for North American investment management. After years in committee and public comment, the Global Investment Performance Standards were adopted.

GIPS are the ethical framework that dictates the manner in which investment performance is presented to clients. Created by the CFA Institute, these recommendations may be utilized by any asset management firm across the globe, which eases a company’s ability to abide by the set standards in any country by providing standardization to the process. GIPS have brought about a sophisticated method of competing worldwide while giving investors confidence in the investment management firm with which they are working. Although voluntary, compliance provides common sense practices to the calculation and presentation of performance data.

Benefits of GIPS Compliance

• Minimum standards ensure that firms are able to fairly compete throughout the world.
• Investors have more confidence in their investments due to fairly presented data and high expectations of ethical presentation.
• Internal controls are clearly defined.
• Standard calculations are simpler to compare in today’s globalized economy.
• Consistency exists when evaluating investment performance data.
• With GIPS compliance comes trust, which can enable the investment firm to garner a larger client base among institutional investors.

How to Become Compliant

Firms must meet and maintain compliance in the each following categories: Fundamentals of Compliance, Input Data, Calculation Methodology, Composite Construction, Disclosure, Presentation and Reporting, Real Estate, Private Equity, and Wrap Fee/Separately Managed Account Portfolios.

• Fundamentals of Compliance – The firm seeking compliance must be defined, excluding ineligible or unrelated subsidiaries. Additionally, all prospective and existing clients must be provided with GIPS compliant presentations, which is neither false nor misleading.
• Input Data – Portfolios must adhere to GIPS Valuation Principles and fair value data.
• Calculation Methodology – Uniform calculation methodology must be applied in order to provide comparability of data.
• Composite Construction – GIPS require that all discretionary portfolios must be included in at least one composite. A composite is defined as, “an aggregation of one or more portfolios into a single group that represents a particular investment objective or strategy.”
• Disclosure – Firms use disclosures to expound upon the relevance of the data provided. While not all disclosures are applicable across the board, the disclosure of compliance is and therefore must be used when appropriate. Additionally, a firm should indicate whether it is verified.
• Presentation and Reporting – All required data, calculations, and disclosures must be fairly presented in accordance with GIPS standards. This often requires firms to exceed minimum standards in order to remain fully compliant. The firm must provide a minimum of five years of annual investment performance that is GIPS compliant. In the event that the firm has been in existence fewer than five years, all annual performance data since inception is required. Once the five years of data requirement is satisfied, the firm must continue to provide reports annually until ten years of GIPS-compliant performance data is obtained.
• Real Estate, Private Equity, and Wrap Fee/Separately Managed Account Portfolios – Disclosures and requirements for these funds are considered supplemental to the aforementioned categories. While some provisions of the preceding categories are applicable, certain guidelines and disclosures held within these individual sections may supersede the guidelines laid out in the previous categories.

Within each category exists both requirements and recommendations for GIPS compliance. The best way an investment management firm can ensure that they are compliant is to accomplish all of the requirements and as many recommendations as possible.

Verification

Being verified by a qualified independent third party is considered to be best practice. While not mandatory, investment management firms claiming GIPS compliance are encouraged to seek out verification. This process can help a firm improve the consistency and quality of its presentation, internal processes, internal procedures, and marketing. Fair representation claims made by investment management firms are justified by the verification process.

Verifiers must have knowledge of GIPS standards, regulations, the firm and its procedures, and methodologies used in calculations. A verifier will examine all seven sections of GIPS compliance for accuracy. Rather than ensuring the calculations, a verifier will ensure that the methods and procedures are accurate. A firm can choose to also have a performance examination of a particular composite compliant presentation if desired. However, the performance examination report may not be issued unless a firm has been verified.

Attaining GIPS compliance can be an arduous task. However, the end result helps assure the investment management firm, existing clients, and potential clients that all data is being fairly represented and assists the firm in competing in the worldwide marketplace.