Is your firm really GIPS Compliant?

News

September 2013

 

The Global Investment Performance Standards (GIPS) were created and funded by CFA Institute (formerly the Association for Investment Management and Research, or AIMR®) to provide an ethical framework for the calculation and presentation of the investment performance history of an investment management firm. The GIPS standards are a voluntary set of standards based on the fundamental principles of full disclosure and fair representation of performance results.

Having one global standard for performance measurement and evaluation benefits both the investment management firms and their clients and prospective clients.

Investment management firms that comply with the GIPS standards allow clients, prospective clients, and consultants the best opportunity to fairly evaluate their past performance. Compliance enables a firm to fairly compete against other firms throughout the world. The GIPS standards also provide a realistic, standardized framework and outline internal controls that are necessary to ensure performance figures are directly comparable.

Prospective clients have a greater level of confidence in the integrity of performance presentations and are able to more easily compare the track records of compliant firms. Compliance with the GIPS standards demonstrates a firm-wide commitment to ethical best practices and the employment of strong internal control processes. Additionally, current clients attempting to evaluate their manager’s performance also benefit from the GIPS standards.

Key features of the GIPS standards include:

  • standards for investment performance presentation and full disclosure of investment performance
  • best practice in the calculation of performance
  • all actual, discretionary, fee-paying portfolios must be included in at least one composite defined by investment mandate, objective, or strategy in order to prevent firms from cherry-picking their best performance
  • standards rely on the integrity of input data and the calculation of valuations of portfolio holdings that drive the portfolio’s performance
  • standards require firms to adhere to certain calculation methodologies and to make specific disclosures along with the firm’s performance.

Other requirements include any updates, Guidance Statements, interpretations, Questions & Answers (Q&As), and clarifications published by CFA Institute and the GIPS Executive Committee, which are available on theGIPS website (www.gipsstandards.org), as well as, in the GIPS Handbook.

The GIPS standards do not address every aspect of performance measurement or cover unique characteristics of every asset class. The GIPS standards will continue to evolve over time to address additional areas of investment performance. Understanding and interpreting investment performance requires consideration of both risk and return.
The fundamental principles that create the foundation for the GIPS standards include:

  • properly defining the firm,
  • providing compliant presentations to all prospective clients,
  • adhering to applicable laws and regulations, and
  • ensuring that information presented is not false or misleading.

The components of proper presentation include:

  • Input Data – all portfolios must be valued in accordance with the definition of fair value and the GIPS Valuation Principles
  • Calculation Methodology – total returns calculated on a time-weighted basis that adjusts for external
  • Composite Construction – must be an asset-weighted average of the performance of all portfolios managed according to a similar investment mandate, objective, or strategy
  • Disclosure – firms must disclose certain information in all compliant presentations regarding their performance and the policies adopted by the firm
  • Presentation and Reporting – firms must incorporate this information in presentations based on the requirements in the GIPS standards for presenting investment performance. Special reporting requirements exist for Real Estate and Private Equity investments, as well as, for portfolios that use leverage and portfolios that are part of a Wrap/SMA program.

Contact Elite Technology Consulting for support in implementing appropriate policies and procedures to become GIPS compliant.

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Copyright 2013 Elite Technology Consulting

09
Sep
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