How to Update Your GIPS Reports for the 2020 GIPS Standards
Sean P. Gilligan, CFA, CPA, CIPM and Matt Deatherage, CFA
August 10, 2020
Investment firms and asset owners that comply with the GIPS standards are required to make some modifications to their GIPS Reports (formerly known as “GIPS compliant presentations”) to address changes made to the 2020 edition of the Standards. The extent of these updates depends on:
- Whether your organization plans to adopt any new optional policies (e.g., carve-outs, estimated transaction costs, etc.)
- If your organization plans to change any calculation methodologies now allowed under the new standards (e.g., switching from time-weighted returns to money-weighted returns where allowable)
- Whether your organization manages pooled funds, separate accounts, or both.
The change of the report name from compliant presentations to GIPS Reports happened as a result of a reorganization of the standards to address the differences between separate account managers, pooled fund managers and asset owners. Depending on your organization, you could have GIPS Composite Reports, GIPS Pooled Fund Reports, and/or GIPS Asset Owner Reports.
Nevertheless, GIPS Report updates are required for all compliant organizations. The updates involve more than changing the name of the document and can vary significantly based on the organization. In this article we focus only on the changes required for organizations already complying with the 2010 edition of the GIPS standards; however, a complete checklist of Required GIPS Report Disclosures for Firms, covering all disclosures required for firms under the 2020 edition of the GIPS standards is available for download. In addition, a checklist of required disclosures for 2020 GIPS Advertisements is also available for download.
Deadline to Update GIPS Reports
Beyond updating the GIPS Reports for disclosures and statistics, organizations must now be able to update these reports with performance information in a timely fashion. Previously there was no set deadline on when a GIPS Report needed to be updated. Organizations are now required to have their GIPS Reports updated within 12 months after each year end. That means that if your firm presents performance for a standard calendar year, by 31 December 2021 all GIPS compliant organizations are required to have their GIPS Reports updated with 2020 performance statistics and related disclosures.
Many firms prefer to wait until their verification is complete before distributing updated GIPS Reports. This is not required, nor is it recommended, but it can help firms avoid material errors in their performance. Firms that prefer to do this will need to ensure their verification is complete within 12 months after each year end. If your firm needs help making sure this work is completed and your GIPS Reports are updated on time, Longs Peak is available to support your process to get this done.
Minimum Updates Required for GIPS Composite Reports (Formerly Compliant Presentations)
GIPS Composite Reports are the same as what was known as GIPS compliant presentations under 2010 GIPS; however, all firms are required to change the following:
1. Edit the wording for the claim of compliance as it has changed for 2020. This disclosure is required to be word-for-word and the wording depends on whether your firm has been verified and if a performance examination was conducted for the composite. Below is the exact wording firms must use:
For firms that are verified
“[Insert name of FIRM] claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. [Insert name of FIRM] has been independently verified for the periods [Insert dates]. The verification report(s) is/are available upon request.
A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. Verification does not provide assurance on the accuracy of any specific performance report.”
For composites of a verified firm that have also had a performance examination:
“[Insert name of FIRM] claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. [Insert name of FIRM] has been independently verified for the periods [Insert dates].
A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. The [insert name of COMPOSITE] has had a performance examination for the periods [insert dates]. The verification and performance examination reports are available upon request.”
For firms that have not been verified:
This did not change in 2020 and should still be disclosded as:
“[Insert name of FIRM] claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. [Insert name of Firm] has not been independently verified.”
2. Add the newly required trademark disclosure, which must be disclosed word-for-word as, “GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.”
3. Add the composite’s inception date.
4. If the composite contains a pooled fund and the firm elects to present prospective pooled fund investors with the GIPS Composite Report rather than a GIPS Pooled Fund Report (discussed later), the fee schedule disclosed must be that of the pooled fund and is required to include the total pooled fund expense ratio.
5. If the firm manages limited distribution pooled funds, the firm must disclose the availability of a list of descriptions of their limited distribution pooled funds. If the firm manages broad distribution pooled funds, the firm must disclose the availability of a list of the names of the broad distribution pooled funds the firm manages.
6. Edit the disclosure previously required about policies for valuing portfolios, calculating performance, and preparing compliant presentations to refer to valuing “investments” instead of valuing “portfolios” and preparing “GIPS Reports” instead of “compliant presentations.” Specifically, that disclosure should now state (emphasis added for clarity), “Policies for valuing investments, calculating performance, and preparing GIPS Reports are available upon request.”
7. If a custom benchmark is used, such as a blended benchmark, the benchmark must clearly be labeled and disclosed as a “custom benchmark.”
8. If not already clearly disclosed, firms are required to indicate whether 3-year annualized ex post standard deviation and dispersion were calculated using gross-of-fee returns or net-of-fee returns. If other risk measures are presented, this must be disclosed for all risk measures.
2020 GIPS Report Changes for Firms with Pooled Funds
Under the 2010 GIPS standards, firms were required to provide GIPS compliant presentations to all prospective clients, as defined in the firm’s GIPS policies and procedures. While not perfectly clear, many firms interpreted this to mean all prospective separate account investors that were interested in opening a separate account that would be eligible for composite inclusion.
The 2020 edition of the GIPS standards clarifies how GIPS applies when marketing to prospective pooled fund investors. Firms are not required to provide GIPS Reports to prospective investors in “Broad Distribution Pooled Funds,” such as mutual funds, but firms are required to provide GIPS Reports to prospective investors in “Limited Distribution Pooled Funds,” such as private funds set up as limited partnerships.
Prospective investors in a limited distribution pooled fund must be provided with one of the following:
- GIPS Composite Report – This is for the composite in which the pooled fund is included. As mentioned in item 4 above, the fee disclosures must be modified to describe the fees of the fund rather than just the management fee that would normally be presented for separate account prospects of the composite. In the GIPS Composite Report, firms can either include both the management fee information for separate account prospects and the fund fee information for pooled fund prospects or two separate versions of the GIPS Composite Report can be maintained, 1) for use with separate account prospects describing the applicable management fees and 2) for pooled fund prospects describing the total fund expenses.
- GIPS Pooled Fund Report – When marketing to pooled fund prospective investors, a new alternative to using a GIPS Composite Report is to create a GIPS Pooled Fund Report. This report is very similar to a GIPS Composite Report, but it describes the details of the actual fund instead of more broadly describing the strategy as done previously in a GIPS Composite Report. All disclosures and statistics are the same as a GIPS Composite Report, except for the following modifications:
- Returns are for the fund itself rather than for a composite of similarly managed portfolios.
- If net-of-fee returns are presented they must be net of total pooled fund fees, not only transaction costs and management fees.
- Dispersion and number of portfolios is not presented since the results are for a single fund.
- The pooled fund description differs from a composite description in that it discusses the actual investment vehicle. Composite descriptions broadly describe the investment objectives and key risks of the strategy without referencing any specific portfolio.
2020 GIPS Report Utilizing Money-Weighted Returns
The 2010 edition of the GIPS standards only allowed the use of money-weighted returns in private equity composites and certain real estate composites where the portfolio manager controlled the timing and amount of external cash flows. The 2020 edition of the GIPS standards allows money-weighted returns to be used, regardless of the asset class as long as certain criteria is met. Please see Longs Peak’s article on How to Update your GIPS Policies & Procedures for GIPS 2020 for more information on when using a money-weighted return is acceptable.
When money-weighted returns are utilized, the requirements for statistics and disclosures are very similar to what was previously required for private equity. For example, instead of time-weighted returns, the GIPS Report will include money-weighted returns as well as several statistics and multiples including:
- Cumulative committed capital
- Since-inception paid-in capital
- Since-inception distributions
- Total value to since-inception paid-in capital
- Since-inception distributions to since-inception paid-in capital
- Since-inception paid-in capital to cumulative committed capital
- Residual value to since-inception paid-in capital
Two differences from what was required for private equity composites under the 2010 GIPS standards and what is required in money-weighted GIPS Reports under the 2020 GIPS standards include:
- Periods presented for statistics – Under the 2010 GIPS standards, private equity composites were required to present returns and other statistics/multiples as of each year-end (e.g., since inception money-weighted returns were presented from inception through the end of each calendar year). The 2020 GIPS standards only require the returns and other figures to be presented through the latest period end (e.g., since inception money-weighted returns are only required to be presented from inception through the end of the most recent period).
- Subscription line of credit – When a subscription line of credit is used, the money-weighted return must be presented both with and without the subscription line of credit unless:
- The principal was repaid within 120 days using called capital and
- No principal from the line of credit was used to fund distributions.
If these two criteria are met, then the money-weighted return may be presented in the GIPS Report without the subscription line of credit.
In cases where firms must present money-weighted returns both with and without the subscription line of credit, firms must disclose:
- The purpose for using the subscription line of credit.
- The size of the subscription line of credit as of the end of the most recent annual period.
- The amount outstanding on the subscription line of credit as of the end of the most recent annual period.
Additionally, if your firm was not using daily cash flows prior to 1 January 2020, you must disclose the frequency that was used (e.g., monthly or quarterly). Daily cash flows are required for periods beginning 1 January 2020.
2020 GIPS Report Changes for Asset Owners
Asset Owners are required to report time-weighted returns for each total fund. In addition to reporting the time weighted returns for each individual total fund, asset owners have the option of creating composites. Composites can be created to present asset class performance or an aggregation of multiple total funds with similar mandates. For these optional composites, asset owners may present time-weighted returns, money-weighted returns, or both.
GIPS Asset Owner Reports for total funds are very similar to the GIPS Pooled Fund Reports created by firms with the following modifications:
- Net-of-fee returns must be included and must be net of:
- transaction costs,
- all fees and expenses (for externally managed pooled funds),
- investment management fees (for externally managed segregated accounts), and
- investment management costs.
Unlike firms that charge a management fee, investment management costs for asset owners include all costs involved in managing the assets including general overhead costs of the investment management function of the asset owner.
2020 GIPS Report Changes for other Optional Policies
As discussed in Longs Peak’s article on How to Update your GIPS Policies & Procedures for GIPS 2020, the updated standards introduce some optional policies firms may elect to adopt. If the following are utilized, disclosures must be updated as described.
Carve-outs – If a composite includes carve-outs with allocated cash, the composite must include “carve-out” in the composite name. This carve-out composite must disclose that the composite includes carve-outs with allocated cash along with a description of how the cash is allocated and the percentage of the composite comprised of carve-outs as of each year end. If the firm also has a composite of standalone portfolios following the same strategy, the annual performance and annual assets of the standalone composite must also be presented with the carve-out composite and a disclosure must be included explaining that the GIPS Report for the composite of standalone portfolios is available upon request.
Estimated Transaction Costs – Historically, only actual transaction costs could be used to reduce returns. Because of this, wrap or other bundled fee accounts (where transaction costs could not be clearly identified) were unable to present a gross-of-fee return. Instead, a pure gross-of-fee return was generally presented, which needed to be labelled as supplemental information. The 2020 GIPS standards now allow the use of estimated transaction costs in cases where actual transaction costs cannot be identified. If estimated transaction costs are used, firms must disclose how the estimated transaction costs are determined.
Model Management Fees – The ability to use model investment management fees to calculate net-of-fee returns is not new, but there is a new disclosure requirement to describe the methodology used to determine the net-of-fee returns using the model fee. Also, under the 2010 edition of the GIPS standards firms were required to disclose the percentage of the composite comprised of non-fee-paying portfolios. Under the 2020 GIPS standards this is still required for composites that present net-of-fee returns using actual fees but is no longer required for composites utilizing model fees to calculate net-of-fee returns.
Advisory-Only Assets – As more firms move strategies to UMA platforms and other similar arrangements where one firm provides trades for another firm to implement, the 2020 GIPS standards now provide guidance on how these assets may be reported. Historically, most firms excluded these assets when reporting total firm assets, but the guidance was not clear so some firms were including these assets in their total firm assets. The 2020 GIPS standards now clearly state that these assets must be excluded from total firm assets, but they do provide guidance on how these assets can also be reported for firms that choose to do so.
In addition to the official total firm assets that excludes advisory-only assets, firms can choose to also present advisory-only assets or a combination of total firm assets and advisory-only assets. Either option must be clearly labelled to explain what is presented. The same can be done for composite assets. Firms must present the actual composite assets and then may also present the advisory-only assets following the strategy or a combination of the composite assets and advisory-only assets together.
Uncalled Committed Capital – Similar to advisory-only assets described above, private fund managers with committed capital cannot include uncalled committed capital when reporting pooled fund assets and total firm assets. Only the current fair value of the fund or firm’s assets can be presented as the fund or total firm assets. But many firms wish to present the amount of uncalled committed capital they have subscribed to their funds.
The 2020 GIPS standards now provide clear guidance on how uncalled committed capital can be shown. At the pooled fund level, it can be combined with the pooled fund assets or it can be shown separately. At the total firm level, it also can be combined with total firm assets or shown separately. Whichever option is chosen, it must be clearly labelled to explain what it represents. To be clear, the official total firm or pooled fund assets must still be disclosed excluding uncalled committed capital. These options to present uncalled committed capital are only allowed in addition to, not instead of this required statistic.
Disclosure Sunset Provisions – Historically, there was no guidance that allowed firms to remove disclosures. The 2020 GIPS standards now specify certain disclosures that can be removed after one year as long as the firm feels the disclosures are no longer necessary for a user of the report to be able to interpret the information presented. Examples of what may now be removed after one year include disclosures regarding:
- Significant events
- Composite name changes
- Retroactive benchmark changes
- Material errors
- Changes in return type (e.g., change from reporting TWR to MWR)
If you have a situation that we didn’t cover here that is specific to your firm or for more information on GIPS Reports, the changes to the GIPS standards for 2020, or GIPS compliance in general, contact Matt Deatherage at firstname.lastname@example.org or Sean Gilligan at email@example.com.