Around the Peak.

Most managers assume that losing an allocation comes down to returns. Underperform the benchmark, underperform peers, and the mandate goes elsewhere. That happens, but it's not usually the reason a manager gets cut from a search after the numbers already looked competitive.

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More often, it's something in how the performance was presented that made an allocator hesitate. A number that didn't match across two documents. A risk statistic nobody could explain. A question in due diligence that the manager couldn't answer cleanly. None of these are calculation errors. They're trust problems, and trust is what allocators are ultimately seeking when they write a check.

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Here are the performance problems we see that cost managers allocations most often, and none of them start with the returns themselves.

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The Numbers Don't Match Across Documents

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An allocator pulls up your factsheet, your pitchbook, and your GIPS® Composite Report, and the composite's five-year return isn't quite the same in all three. Maybe it's a rounding difference, or the factsheet reflects a different "as of" date. The allocator doesn't know that, and they aren't going to assume the best. Inconsistency reads as carelessness, and carelessness in performance reporting raises an obvious question: what else isn't being checked?

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This is why we push firms to treat marketing and GIPS compliance as one coordinated process rather than two departments working from different source files. Every document that leaves the building should trace back to the same underlying data.

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This matters even more now that due diligence itself is being automated. Operational due diligence teams and consultants are increasingly running AI tools that cross-check pitchbooks, factsheets, DDQs, and regulatory filings against each other, flagging contradictions that used to slip through manual review. A rounding difference or a stale figure that a person might have missed a few years ago is exactly the kind of inconsistency these tools are built to catch instantly. Clean, consistent marketing materials aren't just good practice anymore — they're what it takes to pass a review that may happen before a person ever looks at your numbers.

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Performance That Looks Selected, Not Reported

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Showing your best-performing account, your best-performing period, or a composite with an unusually small number of accounts invites the question every allocator is trained to ask: what am I not being shown? Due diligence teams know that everyone can't be top quartile. The SEC Marketing Rule's anti-cherry-picking provisions exist because this pattern is common enough that regulators built rules around it, and sophisticated allocators are watching for it. If your performance can be read as overly flattering rather than representative, assume a diligence team will read it that way.

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Wanting to lead with your best numbers is an understandable impulse. But diligence teams are trained specifically to spot it, and selective disclosure, even when every number in it is accurate, tends to read as a bigger warning sign than an honest, complete track record would. The stronger story is discipline: the periods where you held to your stated mandate and didn't deviate even while returns lagged. That's a harder story to tell than "we outperformed," but it's the one that actually holds up, because it shows you didn't drift toward whatever was working elsewhere just to keep pace. Chasing returns outside your stated process isn't skill, it's strategy drift, and allocators are trained to spot that just as readily as cherry-picked out performance.

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Our advice: resist the instinct to lead with your best examples, and show the scenarios that build trust instead. We recommend showing the ones that demonstrate you stuck to your stated mandate, policies, and procedures, especially when the outcome wasn't your best quarter. Discipline under pressure is a more durable credential than a strong one-off time period, and it's the kind of evidence that holds up long after that number is forgotten.

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Statistics You Show But Can't Explain

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A page full of risk statistics doesn't build confidence on its own. It invites a follow-up question, and if the manager can't explain what a downside capture ratio of 85% says about the decisions actually made in the portfolio, the statistic becomes a liability instead of an asset. Allocators aren't just checking whether the numbers are favorable. They're checking whether the manager understands their own portfolio well enough to explain it. Statistics presented without interpretation signal that the second answer is “no.”

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Likewise, a page of portfolio characteristics that have nothing to do with how the strategy is actually run are not doing you any favors. If you're not making decisions at the sector level, a sector breakdown doesn't tell an allocator anything about your process. If you don't manage individual position sizing, a top-ten holdings list is not adding value.

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Your factsheet should be a roadmap for the conversation you want to have, not a checklist of everything other managers include. Every number on it should be something you can explain: how it got there, what decision it reflects, and what it says about how you manage money. A statistic that's only there because everyone else shows it likely isn't helping you if it doesn’t demonstrate active decision making. It's inviting a question you may not have a good answer to.

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It's the same logic as a good resume. One padded with every certification, hobby, and unrelated past role doesn't read as impressive, it reads as overwhelming and maybe irrelevant, and it makes the reader work harder to find what actually matters to the job at hand. A factsheet works the same way. The strongest ones include only what's relevant to the case being made and make it easy to connect every line back to it.

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No One Can Explain Why a Decision Was Made

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This is the one that costs managers the most, and it's rarely about the numbers at all. An allocator asks why a composite was redefined, why a benchmark changed, or why a particular account was excluded, and the answer is a shrug or "that's how we've always done it." Undocumented decisions create the impression that performance is being managed reactively rather than governed intentionally. Firms that can point to a clear, contemporaneous record of why a judgment call was made close that conversation quickly. Firms that can't do this will leave the allocator wondering what other judgment calls haven't been documented either.

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The Common Thread

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None of these problems are really about whether the strategy performed well. It comes down to whether the story behind the numbers holds up consistently under scrutiny. Allocators aren't just buying returns. They're also buying confidence that what they're being shown today will still be true, and still explainable, a year from now.

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The fix isn't more disclosure for its own sake. It's making sure everything across your performance reporting tells the same, well-documented story before an allocator ever has the chance to ask why it doesn't.

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GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

There is a common assumption among boutique investment managers that the Global Investment Performance Standards (GIPS®) are built for the largest firms in the industry — that compliance is something you pursue once you've reached a certain scale, a certain client type, or a certain level of institutional credibility.

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That assumption is understandable. And it is costing firms real opportunities.

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The GIPS standards have no AUM threshold to get started. There is no minimum number of clients or composites required before a firm can claim compliance. And increasingly, the institutional marketplace is not waiting for firms to reach some undefined moment of readiness before asking for it. If you are newer to the GIPS standards and want a foundation for what they are and why firms pursue them, start with our post What Are the GIPS Standards?

The Market Has Already Decided

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The gatekeepers of institutional capital such as consultants, outsourced CIO platforms, model delivery networks, and institutional allocators, have been quietly raising the bar on performance reporting standards for years. GIPS compliance has shifted from a differentiator to a baseline expectation in many of these channels.

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According to eVestment, two out of three manager searches conducted by investors and consultants on their platform exclude firms that are not GIPS compliant. That means boutique managers without a compliance claim are not being passed over, they are simply not being seen. As we explored in From Compliance to Growth, GIPS compliance has effectively become the price of admission for firms seeking to expand into institutional channels.

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The question is not whether your firm will eventually need it. For most managers with institutional ambitions, the answer to that question is already yes. The real question is when you choose to pursue it, and whether you make that choice on your own terms or in response to a mandate you cannot afford to lose.

What Compliance Actually Builds Inside Your Firm

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The benefits most managers focus on are external. Things like the credibility signal, the access to channels, the due diligence box that gets checked. Those benefits are real. But some of the most meaningful returns from GIPS compliance are internal.

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Implementing the GIPS standards requires firms to formalize processes that often exist informally. Composite definitions. Discretion criteria. Benchmark selection rationale. Fee policies. Error correction procedures. For many boutique managers, the implementation process is the first time these decisions have been documented and applied consistently across the firm.

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That discipline matters beyond GIPS compliance itself. A firm with clean, documented performance infrastructure is better positioned for regulatory examinations, investor due diligence, and operational due diligence reviews. It demonstrates to sophisticated allocators that the firm is run with the same rigor they apply to their own oversight responsibilities. And for firms that are not primarily focused on institutional distribution, this operational foundation has standalone value, the kind of infrastructure that supports sound governance regardless of who is asking. For more on what a well-governed GIPS compliance program looks like once it is in place, see What Good GIPS Compliance Governance Looks Like in Practice.

The Single Best Argument for Starting Now

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Here is the point that does not get made often enough: the smaller your firm and the shorter your track record, the easier it is to become compliant. That ratio flips quickly as you grow.

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Retroactively constructing composites across a large number of separate accounts is genuinely difficult work, particularly when no framework existed at the time to assign accounts to composites at inception, or to move accounts between composites as investment objectives changed, client restrictions were added or removed, or mandates evolved. Working through that history portfolio by portfolio, period by period, requires both detailed documentation and sound judgment. It is one of the most time-consuming phases of any GIPS compliance implementation, and the complexity compounds with every account and every year of history added.

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A firm with 30 separate accounts and a two-year track record faces a very different implementation project than the same firm a few years later with 500 accounts and a five-year track record. The strategy, the clients, and the investment process may be nearly identical, but the administrative burden of reconstructing historical composite membership correctly is not.

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The firms that find implementation most manageable are the ones that started before the project grew into something unwieldy. The firms that find it most painful are the ones that waited until an institutional prospect made it urgent.

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What if you are not ready to commit to full compliance yet?

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That is a legitimate position. But there is a practical middle path worth considering: even if a firm does not want to claim compliance with the GIPS standards today, building out the composite structure and creating policies and procedures for managing those composites now is a worthwhile investment. That framework does not require a formal compliance claim to be useful. Additionally, it can be carried directly into a full GIPS compliance program when the time is right, dramatically reducing the effort required at that stage.

The Real Costs

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Becoming GIPS compliant requires real work, and it is worth being direct about what that entails. At a high level, implementation comes down to four phases: defining the firm, building a GIPS standards policies and procedures manual, constructing composites and calculating performance, and creating GIPS Reports with ongoing monitoring controls. We walk through each phase in detail in A Practical Framework for Implementing the GIPS Standards.

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In terms of ongoing commitment, firms should expect monthly composite management, annual GIPS Report updates, periodic policies and procedures reviews, and distribution tracking. For a lean team, owning all of this internally is often not realistic. The good news is that outsourcing to a GIPS compliance consultant is a well-established path for boutique managers and one that many firms in our client base have taken successfully. The total cost of compliance for a focused, well-organized firm is frequently lower than managers expect, particularly when implementation is approached while the firm's history and account universe are still manageable.

Is This the Right Time for Your Firm?

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Not every firm is at the same point in this decision. Managers with the strongest case for pursuing GIPS compliance now include:

• Firms actively pursuing institutional mandates or seeking coverage from investment consultants
• Managers on model delivery platforms or building toward that distribution channel
• Firms planning meaningful growth over the next two to three years
• Any manager whose clients or prospects have already raised the question
• Firms that simply want to build a best-in-class performance reporting foundation, regardless of where their distribution strategy stands today

The case is lower urgency for firms focused exclusively on high-net-worth or retail clients with no near-term institutional ambitions; however, there is still value in building a sound performance reporting structure, and the sooner it is established, the easier the work will be.

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On Verification: You Can Wait

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Verification is independent, voluntary, and valuable. It is also not required to claim compliance with the GIPS standards, and for cost-conscious boutiques, it is a reasonable place to exercise flexibility.

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A firm can become GIPS compliant today and gain all the operational benefits and the ability to make the compliance claim and defer pursuing verification until there is specific demand for it. When an institutional prospect or consultant asks whether the firm is verified, that is the right moment to add it. The compliance foundation built now makes that future engagement faster and less disruptive. For a detailed walkthrough of what the verification process involves, see our series How to Survive a GIPS Verification.

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Verification is worth having. It just does not need to happen on day one.

The Longer You Wait, The Heavier the Lift

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GIPS compliance is not an initiative that gets easier with time. Every year a firm grows its account base, extends its track record, and adds complexity to its operations without a compliance framework in place is another year of history that will eventually need to be organized, documented, and reconstructed.

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The managers who find implementation most straight forward are not the ones with the most resources. They are the ones who started early enough that the project was still proportionate to the size of the task.

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If your firm is headed toward institutional distribution (most boutique managers we work with are), the best time to build this infrastructure is before you need it. The second best time is now.

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Longs Peak Advisory Services specializes in GIPS compliance and investment performance consulting for investment managers and asset owners. We have helped over 250 firms implement and maintain compliance with the GIPS standards. If you are evaluating whether now is the right time for your firm, we would be glad to talk through it. Reach out athello@longspeakadvisory.com.

GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

Most firms that decide to pursue compliance with the Performance Standards (GIPS®) already understand why it matters. They know institutional investors and consultants often expect it. They understand the credibility that comes from standardized, transparent performance reporting. And they recognize that a strong performance reporting process can improve internal consistency well beyond marketing.

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What many firms struggle with is not the “why,” but the“how.”

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The GIPS standards can be especially intimidating at first glance. There are detailed requirements, technical terminology, and a long list of considerations that touch everything from performance, to operations, compliance, and marketing. For firms approaching GIPS compliance for the first time, it is easy to feel like they need to solve everything at once.

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Whether working independently or with external GIPS support,becoming GIPS compliant is significantly more manageable when approachedthrough a structured process.

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At a high level, implementing the GIPS standards comes down to four major phases:

1. Define the firm and scope the universe of portfolios
2. Build policies and procedures
3. Construct composites and calculate performance
4. Create GIPS Reports and establish ongoing monitoring controls
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The order matters more than many firms realize. When the foundation is built correctly at the beginning, the downstream work becomes significantly easier. For a broader overview of what the GIPS standards are and why firms choose to comply, see our earlier post, What Are the GIPS Standards?

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_{Phase 1: Define the Firm and Scope Your Universe}

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Before constructing composites or calculating returns, firms first need to define the “firm” for the purpose of claiming compliance with the GIPS standards. This sounds simple, but it is often one of the most important decisions in the entire implementation process.

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The GIPS standards require compliance on a firm-wide basis. Firms cannot selectively apply compliance to only their best-performing strategies or business lines. The firm definition determines which portfolios fall within the scope of compliance and ultimately impacts composite construction, total firm assets, disclosures, and marketing claims.

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For smaller organizations, this step is often straightforward. The legal entity, branding, regulatory registration, and operational structure are usually aligned. In those situations, the firm definition may be relatively easy to document.

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For larger organizations with complex legal structures or ones that operate under multiple brands, the analysis can become significantly more complex.

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The following questions should be considered:

• How is the firm held out to the public?
• Do affiliates or subsidiaries share investment personnel or investment decision-making?
• How are the various entities registered and branded relative to one another? 
• How are investment strategies actually managed across entities?
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The answer to these questions matters because the firm definition affects everything that follows. For complex organizations, it is worth investing real time here and involving compliance and legal teams before any other work begins.

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Once the firm is defined, the next step is performing a full inventory of assets (or portfolios) that fall within the defined firm. That includes discretionary accounts, non-discretionary accounts, pooled funds, terminated portfolios, and any other assets managed by the firm over the entire period for which the firm will claim compliance.

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One of the most common implementation mistakes is discovering late in the process that certain portfolios were overlooked or incorrectly categorized. Taking the time upfront to fully scope the universe of portfolios prevents significant cleanup work later on.

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Phase 2: Build Your GIPS Standards Policies & Procedures Manual

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The next step is building the firm’s GIPS standards policies and procedures manual, often referred to as the GIPS standards “P&P.”

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The GIPS standards require firms to document the policies and procedures used to comply with all applicable requirements. But beyond satisfying the standards themselves, strong documentation creates consistency across operations, compliance, marketing, and portfolio management teams. Your GIPS standards P&P becomes the operational blueprint for how your firm calculates performance and maintains GIPS compliance. When drafted thoughtfully, ongoing maintenance becomes manageable. Firms that rush this phase often find themselves cleaning up problems indefinitely.

A well-designed P&P typically addresses the following:

• Firm definition
• Definition of discretion
• Composite construction rules
• Treatment of significant cash flows and composite minimums
• Calculation methodologies
• Fair valuation hierarchy
• Error correction procedures
• Books and records retention
• GIPS Report distribution policies
• Benchmark selection and changes
• Fee schedules and policies for the use of actual or model fees
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The definition of discretion deserves particular attention. Under the GIPS standards, discretion is not the same thing as having legal discretion documented in the investment management agreement. A client may impose restrictions that prevent full implementation of the strategy, and if those restrictions are significant enough, the portfolio should be classified as non-discretionary under the GIPS standards. Firms should establish objective criteria that can be applied consistently across portfolios and clearly document those criteria within their P&P. This determination has a direct impact on composite construction, as only portfolios deemed discretionary maybe included in composites, while non-discretionary portfolios must be excluded.

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Calculation methodology should also be clearly addressed within the P&P. Firms should define how external cash flows are handled, the methodology used to asset-weight portfolios within composites, and whether any composites are subject to minimum asset levels or significant cash flow policies. For a more detailed discussion of large cash flow policies versus significant cash flow policies—and why both matter—see our post Large vs. Significant Cash Flows: What’s the Difference? These methodologies should be clearly documented.

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Finally, firms often do not devote enough attention to developing their error correction policy during implementation. The GIPS standards require firms to establish materiality thresholds in advance that determine what actions must be taken when an error is identified. The time to think through that process is before an error occurs, not in the middle of responding to one.

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We often find that this is the phase where firms realize that implementing GIPS compliance is not just a performance reporting exercise. It frequently exposes inconsistencies in operational workflows, account coding, historical records, or portfolio classifications. That is not necessarily a bad thing. It allows you to intentionally strengthen processes and reporting before those issues surface in higher-stakes situations such as verification, a regulatory examination, or investor due diligence.

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One of the biggest hidden benefits of the GIPS compliance implementation process is that it forces firms to formalize processes that may have evolved informally over time. Many firms come out of the GIPS compliance implementation process with cleaner data, stronger internal controls, and more consistency across teams.

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The key is to make the policies practical. The best GIPS standards P&Ps are not written purely for regulators or verifiers. They are designed to reflect what the firm actually does in practice and to provide internal teams with a framework they can follow consistently.

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Phase 3: Construct Composites and Calculate Performance

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Once your policies and procedures are in place, firms can begin the process of constructing composites and calculating performance. This is the phase most firms typically associate with GIPS compliance because it is where the visible performance reporting work happens. At this point, much of the difficult decision-making should already be complete. Composite construction is next and while that may sound straightforward conceptually, this is the phase where most firms get stuck in the implementation process.

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Under the GIPS standards, discretionary portfolios must be grouped into composites based on similar investment mandates. The goal is to ensure firms present strategy-level performance fairly and consistently instead of selectively highlighting individual account results. The construction process typically has four steps:

1. Identify every portfolio that meets the composite definition
2. Determine the correct dates each portfolio should be in and out of the composite
3. Asset-weight the portfolio-level monthly returns to produce composite-level performance
4. Calculate all required composite-level statistics, including internal dispersion and the three-year annualized ex-post standard deviation of both the composite and the benchmark

It sounds simple, but it’s not always easy. The data work alone is substantial. Before anything meaningful can be built, the underlying portfolio-level data must be reviewed to ensure it is reconciled and accurate. That foundation matters because everything downstream depends on it.

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The historical composite membership analysis adds another layer of complexity. Strategies evolve. Clients add or remove restrictions. Portfolios change mandates. When building a composite with a ten-year history, the question is not simply which portfolios belong in the composite today. Itis which portfolios belonged in the composite during each period in the historical record, and why. Working through that analysis portfolio by portfolio and period by period requires both strong documentation and sound judgment.

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The good news is that there are tools available to help firms identify historical performance outliers to help test if composite inclusion was accurate. When a portfolio within a composite posts a return that deviates meaningfully from its peers during a given period, that deviation can be identified for further research. Was there a client-imposed restriction during that period that prevented full implementation of the strategy (i.e., making it non-discretionary)? Or was the deviation driven by a large cash flow, different starting position, security-specific activity, or simply the normal variation expected across portfolios managed within the same strategy? The answer determines whether the portfolio appropriately belongs in the composite for that period, and the wrong conclusion in either direction can undermine the integrity of the track record.

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It is also important to be direct about the limits of technology in this process. Software can identify anomalies, efficiently perform calculations, and output results once the inputs are correct, but no system makes judgment calls. Determining how composites should be defined, how discretion should be applied, what constitutes a significant restriction, and how to evaluate edge cases in historical membership all require experienced professionals who understand both the investment strategies and the GIPS standards. The policies documented in Phase 2 provide the framework but applying that framework consistently across real portfolios and real historical circumstances requires thoughtful human judgment at every step.

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Perhaps most importantly, composite construction should not be treated purely as an operations exercise. If composites are built solely around how data happens to be structured within the portfolio accounting system, without input from the investment team and without alignment with sales and marketing, the result may be operationally convenient but commercially ineffective. Bringing together operations, performance, investment professionals, and sales and marketing teams early in the process is essential. That collaboration is what ultimately produces results that are not only GIPS compliant, but also meaningful, defensible, and aligned with how the firm communicates its investment approach.

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Phase 4: Create GIPS Reports and Go Live

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The final phase of becoming compliant is creating the GIPS Composite Report(s). The GIPS Report is the firm’s external-facing proof of compliance and is a presentation that must be provided to every prospective client. Getting to this stage is what most people think of as going live, but in practice it is a milestone, not the finish line.

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GIPS Reports require more than simply presenting returns in a table. Firms must include required statistics, disclosures, benchmark information, and firm-level details necessary for prospective clients to properly interpret the results. The disclosures are especially important because they provide context investors need to understand how the performance was calculated and what the results represent. They are very specific and must be in sync with what is documented in the P&P and what was performed to construct the composites. For more specifics on what is required, see our previous post, How to Update Your GIPS Reports for the 2020 GIPS Standards.

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Once the GIPS Reports are complete and all requirements have been met, the final administrative step to claiming compliance is submitting the GIPS Compliance Notification Form to CFA Institute. This must be filed before compliance can be claimed, and it must be renewed annually.

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Ongoing Maintenance: Where Most Firms Struggle

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Getting to compliance is an achievement. Staying there requires consistent operational discipline.

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The most common breakdowns in ongoing maintenance are rarely dramatic failures. More often, they are small process gaps that compound over time. Portfolios that should have been added to composites were omitted or added late. Significant cash flows were not handled in accordance with the composite’s policy. A new strategy was launched without formally determining whether it warranted the creation of a new composite.

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To avoid these breakdowns, firms should incorporate GIPS compliance procedures into their regular monthly or quarterly performance processes rather than treating compliance as an annual reporting exercise. Clear ownership should be assigned internally and firms should establish a recurring compliance calendar that includes monthly composite reviews and annual GIPS Report updates. The GIPS standards policy manual should also be reviewed at least annually to confirm it continues to reflect how the firm actually operates. For a deeper look at what effective ongoing governance looks like in practice, see our post What Good GIPS Compliance Governance Looks Like in Practice.

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Should You Get Verified

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Verification is not required. Firms that are early in the process sometimes view this as a bigger decision than it needs to be. If a firm chooses to pursue verification, it must be performed by an independent third party, but the decision itself is entirely voluntary.

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That said, verification is generally worthwhile, particularly for firms competing for institutional mandates where GIPS compliance is often considered table stakes. According to eVestment, two out of three searches conducted in their database by investors or consultants exclude firms that are not GIPS compliant, so the marketing benefit can be meaningful. Verification also provides an added level of assurance that the firm’s policies and procedures have been designed in accordance with the GIPS standards and implemented consistently across the organization. Operationally, it can create valuable discipline as well, since the expectation of independent review encourages firms to maintain strong processes throughout the year.

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For firms that are newer to compliance or navigating budget constraints, the best path is often to first establish a solid compliance foundation and then pursue verification when the timing makes sense. We have also worked alongside nearly every major verifier in the industry and can provide practical insight into how different firms approach the process, what working styles may align best with your organization, and how to evaluate which verifier may be the best fit for your needs. For a more detailed walkthrough of the process, see our series on How to Survive a GIPS Verification.

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Final Thoughts

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Becoming GIPS compliant can feel overwhelming at the start, especially when going through it for the first time. But it does not have to be. For firms that approach implementation as a structured operational framework — rather than a collection of isolated technical requirements —typically find the process much more manageable.

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The goal is not simply to produce a compliant presentation. The real value comes from building a repeatable, transparent, and defensible framework for calculating and presenting investment performance.

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When implemented thoughtfully, the GIPS standards do more than support marketing efforts. They help firms improve consistency, strengthen controls, and communicate performance results with greater credibility and transparency. And in an environment where investors continue to demand greater transparency and comparability, those operational improvements can provide a meaningful competitive advantage, strengthening both credibility and investor confidence.

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Every Spring, the performance measurement community gathers for PMAR: The Performance Measurement, Attribution & Risk Conference, hosted by TSG. This year marked the twenty-fourth annual, and I left thinking about it differently than I have in years past.

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Most years, the themes evolve gradually. This year, I felt like the ground was moving.

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The theme nobody put on the agenda but ran underneath nearly every session was the pace of change. Specifically, what artificial intelligence is about to do to our work. And while I came away energized, I also came away with a healthy dose of " we (as in everyone) are not ready for how fast this is coming."

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Here's what stayed with me.

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AI Was the Undercurrent of the Whole Event

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The session titled "AI, Anxiety, and Opportunity: What Performance Professionals Need to Know" was, predictably, one of the most sought-after sessions of the conference. The panel, which included practitioners from across the industry, did a nice job naming both sides of the coin: the anxiety of not knowing what your job looks like in five years, and the opportunity sitting right in front of us if we lean in.

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Here's my honest read of the room, though. The mood was optimistic. Maybe a little too optimistic. There was a comfortable assumption that AI will mostly handle the tedious parts and leave the interesting work to us. Or that AI won’t take your job, someone that knows AI will. I'm not sure it'll be that tidy.

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From what we're already seeing in our own work and across the firms we serve, the capabilities are advancing faster than most people can comprehend. The days where “our industry is just slower to adapt” are gone. Just last week, anthropic released Fable 5 and before it was shut down (temporarily?), we played around with it a little and its capabilities are dumbfounding. I don't think it will be long before these conferences look drastically different. Different sessions, different vendors, maybe a different sense of what the job even is. That's not a doom prediction. It's just a reason to pay closer attention than feels comfortable.

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Separating Skill From Luck Just Got Harder and More Important

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One of my favorite sessions was Michael Ervolini's "You Can't Find Skill in Returns: Distinguishing Performance From the Decisions That Generate Them." It's a deceptively simple premise: returns tell you what happened, not whether the manager was actually good. A great number can come from a great decision, or from luck. A bad number can hide genuine skill.

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What I appreciate about PMAR is that the community keeps bringing fresh perspectives to this old, hard problem: how do we actually evaluate skill versus luck? It's a question that never fully resolves, and every year someone pushes the thinking forward.

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It struck me that this question gets more important in an AI world, not less. As machines take over more of the calculation and even some of the decision-making, our value shifts toward judgment – knowing which decisions deserved credit, which results were noise, and what a number actually means in context. That's the kind of discernment a model can assist with but can't own. For more from Mr. Ervolini, here's a link to his latest book Skill vs. Luck.

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The GIPS Challenges That Keep Coming Back

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I'm biased here, but the "Common GIPS Challenges and How to Avoid Them" session was a highlight for us, in part because our own Matthew Deatherage, CFA, CIPM, was on the panel alongside peers from TSG, MassPRIM, and Strategic Investment Group.

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What I always find striking about this topic is how consistent the challenges are. Firms pursuing compliance with the Global Investment Performance Standards (GIPS®)* tend to stumble on the same handful of issues year after year, and almost all of them are avoidable with the right foundation in place. That's a big part of why we do what we do at Longs Peak: helping firms get ahead of those pitfalls instead of discovering them during verification or, worse, during a regulatory exam.

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Matt is a familiar face on these panels, and it's great to have our perspective in the mix. But the takeaway that stuck with me tied right back to the AI thread running through the whole conference.

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Across several different panels, presenters talked about feeding the GIPS standards into their own AI models to churn out GIPS reports. And here's the thing, anyone can do that. You can drop the standards into a model in minutes. What a model can't do is provide critical judgment about how a principles-based framework should be applied to your specific facts and circumstances and whether those GIPS reports and statistics were calculated correctly. The GIPS standards aren't a checklist; they're a set of principles that require interpretation, and interpretation is exactly where experience earns its keep.

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I'm not saying don't use AI to help build a framework. Use it. But like any model, if you don't really know what you're asking it to do, the output won't save you. Simply asking a model to "make my firm GIPS compliant" isn't going to make it so. At least not yet!

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And there's one problem every performance professional already knows AI hasn't solved: data. As they say, garbage in, garbage out. Meaningful performance lives and dies on clean, well-organized data, and no software tool or AI model fixes messy inputs alone. At Longs Peak, we have spent the last 10 years working with clients to improve data quality through data integrity testing. For us, these AI models have only expanded what’s possible. We know one thing for sure: setting these tools up with the proper context (i.e., knowing what to look for) and then evaluating that context on an ongoing basis may turn out to be the most crucial piece of it all.

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CFA Institute Is Listening on the CIPM

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A session I didn't expect to find as interesting as I did was "CIPM Through the Practitioner Lens," facilitated by Rob Langrick of CFA Institute. Rather than simply presenting at the room, CFA Institute came to listen and gather candid feedback on the CIPM designation: where it's delivering value, where it's falling short, and how it should evolve to stay relevant to the work we actually do day to day.

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The audience didn't hold back, and there were some genuinely thoughtful suggestions including how the code of ethics will evolve in this new AI era, some recommendations on reformatting the exam to break it into smaller chunks (going into greater detail on each) as well as adding a CIPM group within the CFA societies to encourage further connection. It was refreshing to see CFA Institute putting real energy behind a credential that so many of us have invested in and want to see grow in value. Given the pace of change in our field, willingness to adapt feels necessary. For anyone interested in contributing ideas to the CIPM, you can use this link to provide feedback.

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A Quick Word on the Trivia

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I'd be remiss not to mention that Performance Trivia got a much-needed upgrade this year. In past years, only a handful of contestants got to play while the rest of us watched (though in fairness, not all of us were clamoring for the spotlight). The new format this time allowed everyone to participate (without taking center stage), and it was a lot more fun for it. A small change, but it captured something I value about this community: it's competitive, but it's also genuinely collegial and prides itself on memorizing quirky names and vintage formulas.

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Before PMAR Even Started: Women in Performance Measurement

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For me, the week actually started the day before the conference, at the Women in Performance Measurement (WiPM) gathering. An event created just for the women in our industry. It's one of my favorite parts of this trip every year, and not only because the conversation is good. There's something energizing about being in a room full of women who do this work, comparing notes and reconnecting.

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Fittingly, AI came up here too, though in a much more hands-on way than it would on the main stage. Practitioners shared real use cases, both personal and professional: the small ways AI is already saving them time day to day, and the bigger experiments they're running at their firms. It was practical, curious, and refreshingly free of hype.

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We were also lucky to have a guest speaker, Lidia Arshavsky, who spoke on executive presence. She broke down how executive presence actually gets evaluated inside organizations (the signals people pick up on, often without realizing it) and offered practical recommendations for strengthening your own. It was the kind of talk that's useful no matter where you are in your career.

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It was a great way to kick off PMAR, and an even better way to reconnect with women I only get to see a few times a year. Sometimes the most valuable part of a conference happens in these opportunities to network and reconnect within our niche performance community. A big thank you to TSG who donated the space for this event to take place and have done so for many years.

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What AI Can't Take From Us

‍

The conference's forward-looking sessions, including "Innovative Ways to Present Performance: Dashboards & Analytics," got me thinking. The tools are evolving so quickly and so much of the analysis, presentation, and reporting can now be automated. I am left wondering how long the traditional use of software in our space will last in its current form.

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When the capabilities advancing fastest don’t always come from the established vendors, who benefits? My hope is that everyone does. That these tools level a playing field that used to tilt heavily toward the largest institutions, give smaller firms the ability to deliver high-caliber analytics previously out of reach, and push the whole field toward better solutions. That makes for a more competitive space and ultimately a clearer picture for investors to evaluate their options.

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That's the optimistic case, and I believe it. But it only holds if we stay clear-eyed about where our own value comes from and that's the note I want to leave you on. The pace of change is a reason to focus, not to panic. The things that make us valuable are the things AI can't take: consciousness, judgment, and the human-in-the-loop accountability that clients ultimately trust. Machines will calculate faster and present prettier. They won't sit across the table from a client and take responsibility for what a number actually means.

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So, by all means, get curious about the tools (Claude seemed to be most people’s favorite – mine as well). Experiment. Don't be the individual or firm that gets left behind. But anchor yourself in the part of this work that's irreplaceably human, because that's the part that was always the point.

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See you at PMAR 2027. I suspect it'll look a little different.

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________________________________________

GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

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Mission-driven institutions are entrusted with something larger than capital. They are entrusted with purpose.

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Endowments, foundations, and long-term investment pools exist to support education, healthcare, research, environmental initiatives, religious or cultural programs, community development, and countless other causes—often for generations.

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That long-term horizon changes how investment performance should be reported. Because when an institution thinks in decades instead of quarters, investment performance is not just about what happened recently, itis about whether the portfolio is structured to sustain spending, preserve purchasing power, and remain aligned with its mission through full market cycles.

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Many institutions rely entirely on their investment managers to calculate and present investment performance. That’s common, but it’s not always sufficient.

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Performance Oversight Is Not the Same as Performance Results

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Investment managers are responsible for generating returns. Boards and oversight committees are responsible for evaluating those results.

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Those responsibilities are distinct.

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Oversight is a fiduciary duty. It is not passive, and it cannot rely solely on the information created by the party being evaluated. Effective oversight requires independence, consistency, and clarity.

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When the same party both manages assets and determines how performance is calculated and presented, the lines between management and oversight can blur—even when intentions are sound and calculations are technically accurate.

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In some situations, reporting may not be:

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• Consistent across managers
• Based on uniform calculation methodologies
• Presented in a format designed for governance review
• Structured to facilitate long-term policy evaluation

Consider a board reviewing results from three different managers. Each reports strong performance, but one calculates returns net-of-fees, another presents gross results, and a third uses slightly different valuation timing.

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At first glance, the numbers appear comparable. In reality, they may not be measuring the same thing.

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Some larger institutions maintain internal performance teams or engage independent performance professionals to standardize reporting, organize data across managers, and present results in accordance with established best practices—often aligning reporting with their Investment Policy Statement and/or recognized frameworks such as the Global Investment Performance Standards (GIPS® standards).

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But many of these organizations operate lean. They may not have dedicated performance measurement expertise or the infrastructure required to consolidate, normalize, and present results in a governance-ready format.

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In those cases, boards are often reviewing manager-produced materials that were designed primarily for client communication—not institutional oversight. Performance reporting for these institutions should be designed to serve the governing body—not simply to showcase results.

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Why This Matters for Mission-Based Institutions

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Boards of endowments and foundations are often composed of dedicated volunteers, philanthropists, community leaders, and subject-matter experts. They bring vision, experience, and commitment to the institution’s mission—but not always a deep understanding of investment management and reporting.

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That makes investment performance clarity essential. When reporting is unclear, oversight weakens—not because trustees lack commitment, but because the information is not presented in a way that supports meaningful evaluation.

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When reporting is structured and tied directly to policy benchmarks, risk parameters, and spending objectives, trustees know what questions to ask. Conversations remain focused on long-term sustainability and mission impact.

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A Practical Framework for Strong Performance Reporting

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Boards of mission-driven institutions are often operating at the governance-level and should evaluate their reporting structure against four questions:

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1. Is performance calculated independently?

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Independent calculation or oversight reduces potential conflicts and strengthens fiduciary governance. In institutional investing, separating portfolio management from performance oversight is widely viewed as a best practice.

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2. Is the methodology consistent across managers?

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Multi-manager portfolios require uniform return calculation, fee treatment, and valuation policies to ensure comparability. Without consistency, “relative performance” becomes difficult to interpret.

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One practical way institutions address this challenge is by complying with and requiring their managers to comply with the GIPS® standards.

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The GIPS standards are a globally recognized framework administered by CFA Institute designed to promote fair representation and full disclosure in the calculation and presentation of investment performance.

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Endowments and foundations that adopt the GIPS standards for their own performance calculations—and require the same of the managers they hire—send a powerful message to their boards and stakeholders that the institution is committed to transparency in how results are calculated and presented.  

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3. Is reporting aligned with policy benchmarks?

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Boards should see performance relative to long-term policy objectives, not just absolute returns. And this information should be shown at the level at which it is managed. Simply reporting that “the portfolio returned 8%” does not answer the real governance question.

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A portfolio can have a positive year and still fail to meet its strategic role within the overall allocation.

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For example:

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• Did the equity allocation meet its return objective relative to its benchmark?
• Did the diversifying strategies provide the downside protection they were intended to deliver?
• Did fixed income serve its role as a stabilizer?
• Did alternative investments justify their complexity and liquidity constraints?

Even if the overall portfolio met its expected return, boards should understand how it got there. Reviewing performance by allocation allows boards to evaluate whether each segment is fulfilling its mandate, not just whether the total return looks acceptable.

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When reported this way, it becomes easier to see where the portfolio is meeting expectations and where it may be falling short.

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4. Is communication designed for governance?

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Once performance is aligned to policy benchmarks, reporting should help trustees interpret what the results mean without requiring them to operate at the manager or security-selection level.

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Reports should help answer key questions:

·        Are we meeting long-term objectives?

·        How are managers performing relative to their mandates?

·        Is risk aligned with the investment policy?

·        Are we preserving capital appropriately given our spending needs?

·        Did managers follow investment guidelines that align with our institution’s mission?

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If any of these areas underperform, governance-level reporting should prompt clear, high-level discussion: Why did this occur? Was the result consistent with expectations? What steps, if any, are being considered to address issues going forward? If shortfalls persist, boards may need to evaluate whether the strategy or manager remains appropriate.

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This kind of oversight strengthens outcomes by reinforcing accountability. Performance reporting should be communicated in plain language and simplify complex data into clear actionable insight. When this occurs, it enables boards to move from procedural review toward informed, effective governance.

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From Calculation to Communication

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Accurate returns are the starting point. Clear communicationis the outcome.

When performance calculation, oversight, and presentation are thoughtfully structured, board discussions become more strategic and less reactive. Boards gain confidence in their oversight, managers operate within clearer expectations, and the institution stays focused on its purpose.

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A Closing Thought

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Mission-driven institutions think in decades, not quarters. Their performance reporting should reflect that same discipline. Investment oversight is not just about generating returns, it is about ensuring those returns are measured, understood, and aligned with the institution’s long-term purpose.

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Clear reporting strengthens governance.
Strong governance protects sustainability.
And sustainability protects the mission.

Understanding Tracking Error & R-Squared

When evaluating the performance of an investment portfolio, it's essential to consider metrics that help measure the portfolio's consistency and alignment with its benchmark. Two critical metrics in this context are Tracking Error and R-Squared. These metrics provide insights into the portfolio's performance and risk characteristics. Let's explore what these metrics mean, how they are calculated, and their significance.

What is Tracking Error?

Tracking Error measures the deviation of a portfolio's returns from its benchmark returns. It indicates how closely a portfolio follows the benchmark to which it is compared. A lower tracking error suggests that the portfolio's returns are closely aligned with the benchmark, while a higher tracking error indicates greater deviation.

Tracking Error Formula

Tracking Error= standard deviation of (P-B)

where:

• P = Portfolio return
• B​ = Benchmark return

Annualized Tracking Error

When using monthly data, tracking error is annualized by multiplying the result by the square root of 12.

What is a Good Tracking Error?

A "good" tracking error depends on the investment strategy. For passive funds that aim to replicate a benchmark, a lower tracking error is desirable. For active funds that seek to outperform the benchmark, a higher tracking error might be acceptable, reflecting the manager's active bets.

What is R-Squared?

R-Squared (R²) measures the proportion of the portfolio's movements that can be explained by movements in its benchmark. It ranges from 0 to 100%, where a higher R-Squared indicates a greater correlation between the portfolio and its benchmark.

R-Squared Formula

R² = (Correlation of portfolio and benchmark returns)²

What is a Good R-Squared?

A higher R-Squared (closer to 100%) indicates that the portfolio's returns are highly correlated with the benchmark. For passive funds, a high R-Squared is preferred. For active funds, a lower R-Squared might indicate that the manager is taking independent positions relative to the benchmark.

How to Interpret Tracking Error and R-Squared

• Tracking Error: Indicates the consistency of the portfolio's returns relative to the benchmark. A lower tracking error is desirable for passive strategies, while active strategies might tolerate higher tracking errors.
• R-Squared: Shows the degree of correlation between the portfolio and benchmark returns. A high R-Squared suggests strong alignment, suitable for passive strategies, while a lower R-Squared might indicate active management.

While both Tracking Error and R-Squared are good measures to understand how closely a track record is managed to a benchmark, they should be analyzed with other available performance metrics. A high or low Tracking Error and R-Squared does not indicate if the performance was good or not. Therefore, using Tracking Error in combination with other metrics like Alpha or the Sharpe Ratio can help provide additional information on whether the strategy performed well while analyzing how closely it was managed to a benchmark. Any selected performance metric should also cover the same time periods as the calculated Tracking Error and R-Squared for the most relevant comparison.

Why are Tracking Error and R-Squared Important?

Both metrics are crucial for assessing portfolio performance and understanding the risk-return profile. They help investors gauge how well a portfolio is managed relative to its benchmark and assess the effectiveness of active versus passive management strategies.

Conclusion

Tracking Error and R-Squared are essential tools for evaluating portfolio performance. Understanding these metrics can help investors make informed decisions about their investment strategies and better manage their portfolios.

For more information on performance metrics and investment strategies, feel free to contact us or explore our other resources on investment performance.

If you’ve been around the Global Investment Performance Standards (GIPS®) long enough, you know that governance is one of those topics everyone agrees is important, but far fewer firms can clearly explain what good governance with the GIPS standards actually looks like day to day.

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Most firms don’t fail at GIPS compliance because they misunderstand a technical requirement. They struggle because ownership is unclear, decisions are informal, or key knowledge lives in one person’s head. When that person leaves (or when the firm grows) things start to break.

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So, let’s simplify this.

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Below is a practical, real-world view of what good governance looks like when complying with the GIPS standards—not in theory, not in a policy document that no one reads, but in how well-run firms actually operate.

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Start with the Right Mindset: Governance Is About Sustainability

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At its core, GIPS compliance exists to answer one question:

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Can this firm consistently calculate, maintain, and present performance fairly and accurately—regardless of growth, staff changes, or market stress?

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The GIPS standards are built on the principles of fair representation and full disclosure, but governance is what turns those principles into repeatable behavior. Good governance doesn’t mean more paperwork or compliance headaches. It means clear accountability, documented decisions, and controls that actually get used.

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1. Clear Ownership (It’s Rarely Just One Person)

One of the most common governance risks we see is a “GIPS compliance department of one” where critical knowledge, decisions, and processes are concentrated with a single individual. While this can work in the short term, it creates challenges around continuity, oversight, and scalability as the firm grows or changes.

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Good governance starts by clearly defining:

• Who owns GIPS compliance overall
• Who performs monthly/quarterly/annual tasks
• Who reviews and approves key inputs/outputs
• Who resolves judgment calls
• Who ensures it also complies with other relevant regulations  

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In practice, this often looks like:

• A GIPS compliance committee or designated governance group
• Representation from performance, compliance, operations, and senior management
• Defined escalation paths for gray areas (e.g., discretion, composite changes, error corrections)

When a firm isn’t large enough to support a formal committee, outsourcing to a GIPS compliance consultant or a provider of managed services can be an effective alternative. These individuals can help you design policies, create procedures, and essentially manage governance for you.

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But even if you are big enough, having an independent third party on your GIPS compliance committee can provide an objective, well-informed perspective formed by experience across many firms and a deep understanding of what works well in practice.

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2. Policies and Procedures That Reflect Reality

Every GIPS compliant firm has GIPS standards policies and procedures (GIPS standards P&P). Well-governed firms actually use them.

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Strong GIPS compliance governance means your GIPS standards P&P:

• Include procedures your firm actually follows instead of only stating policies
• Reflect how performance is really calculated
• Clearly document firm-specific elections and judgments
• Are updated when the business changes (for new products, systems, asset classes)

Think of your GIPS standards P&P as the firm’s operating manual for performance, not a static compliance artifact. If someone new joined your performance team tomorrow, they should be able to follow your policies and procedures to calculate performance and arrive at the same results. If not, governance needs work.

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3. Formalized Review and Oversight

Good governance includes independent review, even if it’s internal.

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In practice, this often means:

• Secondary review of composite membership decisions
• Review of significant cash flow thresholds and discretion determinations
• Approval of new composites and composite definition changes
• Oversight of error identification and correction

This is where governance protects firms from subtle but costly mistakes, especially those that show up during verification and increase complexity and scope of these engagements. In an ideal situation, these internal reviews should catch issues before they become problems.

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As a provider of managed services, Longs Peak helps firms identify performance outliers, accounts that are breaking composite rules, and other data anomalies. This review significantly reduces the risk of erroneous data ending up in your performance and later caught in verification. If you are not able to do this internally, we strongly recommend outsourcing this effort.

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4. Governance Extends to Marketing and Distribution

One area that has been increasingly important is the intersection of GIPS compliance, the SEC marketing rule, and how you manage the distribution of marketing materials.

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Well-governed firms:

• Control who can distribute GIPS Reports and how they are distributed
• Ensure Marketing understands what is and is not an advertisement that meets the requirements of the GIPS standards
• Coordinate GIPS compliance requirements with broader regulatory rules, including the SEC marketing rule
• Have a clear process for tracking distribution

This alignment helps firms avoid inconsistencies between factsheets, pitchbooks, and GIPS Reports—one of the fastest ways to lose credibility with prospects and regulators.

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Some clients prefer not to mention GIPS compliance at all in their marketing (i.e., on their factsheets and pitchbooks) until a client is clearly interested in one of their strategies. Once they meet the definition of a prospect (as outlined in your GIPS standards P&P), it triggers the requirement to send a GIPS Report and they find this smaller list of prospects easier to maintain. For others, having everything in one document including required GIPS compliance information and disclosures is easier to manage than separate documents.

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There is no “right” way to manage this, but in either case, having a clear process for tracking and reporting performance errors is key.

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5. Documentation of Decisions (Not Just Results)

Here’s a subtle but critical point: Good governance for your GIPS compliance program documents decisions, not just outcomes.

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Why was that composite redefined?
Why was this benchmark changed?

Why was this model fee selected?

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Strong governance creates an audit trail that:

• Supports sound reasoning (which aides in the verification process or even regulatory exams later on)
• Reduces key person risk
• Makes future reviews faster and less stressful

This is especially valuable when firms grow, merge, or experience turnover. Clear documentation allows others to step in seamlessly and continue critical functions without disruption. More importantly, it enables independent parties, such as a regulator or your verifier, to understand, assess, and validate how you are calculating and presenting performance that may not be immediately intuitive.

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6. Governance Is Ongoing, Not a One-Time Project

The best-governed firms don’t “set and forget” their GIPS compliance program. They revisit governance when:

• New strategies launch
• Systems or custodians change
• Regulations evolve
• The firm’s structure changes

In other words, governance evolves with the business—because performance reporting doesn’t exist in a vacuum.

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Even for firms that are not regularly launching new strategies, changing systems or structure, an annual review of your GIPS compliance program and governance framework is critical. This review helps confirm that practices have remained consistent, while also providing an opportunity to reflect on whether you are satisfied with your verifier, assess whether new regulations require updates, and reconsider how composites are managed or described.

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The best time to do this is at year-end so that if you decide something should be changed, you can do that proactively for the upcoming year, rather than having to fix it retroactively.

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What Good GIPS Compliance Governance Really Buys You

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When GIPS compliance governance is working well, firms experience:

• A structured, intentional process for validation of your performance results
• A framework that supports consistency and transparency over time
• Fewer surprises or last-minute scrambles during verification or regulatory review
• Greater confidence from regulators and verifiers that you are following established policies and procedures
• Lower operational and reputational risk

Most importantly, it creates trust internally and externally. Good GIPS compliance governance isn’t about being perfect. It’s about being intentional.

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Clear ownership. Thoughtful documentation. Real oversight. Those are the firms that don’t just claim compliance, they live it.

‍Why “Net” Is Not a One-Size-Fits-All Answer

If you’ve worked in the investment industry, you’ve probably heard some version of this question:

“Should we show net or gross performance—or both?”

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On the surface, the answer seems straight forward. The rules tell us what’s required. Compliance boxes get checked. End of story.

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But in practice, presenting net and gross performance is rarely that simple.

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How you calculate it, how you present it, and how you disclose it can materially change how investors interpret your results. This article goes beyond the rulebook to explore thepractical considerations firms face when deciding how to present net and gross returns in a manner that is clear, helpful, and in compliance with requirements.

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Let’s Start with the Basics (Briefly)

At a high level, for separate account strategies:

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• Gross performance reflects returns before investment management fees

• Net performance reflects returns after investment management fees have been deducted

Both gross and net performance are typically net of transaction costs, but gross of administrative fees and expenses. When dealing with pooled funds, net performance is also reduced by administrative fees and expenses, but here we are focused on separate account strategies, typically marketed as composite performance.

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Simple enough. But that definition alone doesn’t tell the full story—and it’s where many misunderstandings begin.

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Why Net Performance Is the Investor’s Reality

From an investor’s perspective, net performance is what actually matters. It represents the return they keep after paying the manager for active management.

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That’s why modern regulations and best practices increasingly emphasize net returns. Investors don’t experience gross returns. They experience net outcomes.

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And let’s be honest: if an investor chooses an active manager instead of a low-cost index fund or ETF tracking the same benchmark, the expectation is that the active approach should deliver something extra—after fees. Otherwise, it becomes difficult to justify paying for that active management.

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Why Gross Performance Still Has a Role

If net returns are what investors actually receive, why do firms still talk about gross performance at all?

Because gross performance tells a different, but complementary, story: what the strategy is capable of before fees, and what investors are paying for that capability.

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The gap between gross and net returns represents the cost of active management. Put differently, it answers a question investors are implicitly asking:

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How much return am I giving up in exchange for this manager’s expertise?

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Viewed this way, gross returns help investors assess:

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• Whether the strategy is adding value before fees
• How much of the performance is driven by skill: security selection, asset allocation or portfolio construction
• Whether fees are the primary drag—or whether the strategy itself is struggling

When gross and net returns are shown together, they create transparency around both skill and cost. When shown without context, they can easily obscure the economic tradeoff.

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Gross-of-fee returns are also most important when marketing to institutional investors that have the power to negotiate the fee they will pay and know that they will likely pay a fee lower than most of your clients have paid in the past. Their detailed analysis can more accurately be done starting with your gross-of-fee returns and adjusting for the fee they expect to negotiate rather than using net-of-fee returns that have been charged historically.

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The Real-World Gray Areas Firms Struggle With

How to Present Gross Returns

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Gross returns are pretty straightforward. They are typically calculated before investment management or advisory fees and usually include transaction costs such as commissions and spreads.

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For firms that comply with the GIPS® Standards, things can get more nuanced—particularly for bundled fee arrangements. In those cases, firms must make reasonable allocations to separate transaction costs from the bundled fee. But, if that separation cannot be done reliably, gross returns must be shown after removing the entire bundled fee. [1]

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Once you move from gross to net returns, however, the conversation becomes less straightforward. We’ve had managers question, “why show net performance at all?” This is especially the case when fees vary across clients or historical fees no longer reflect what an investor would pay today. Others complain that the “benchmark isn’t net-of-fees,” making net-of-fee comparisons inherently imperfect. These concerns highlight why presenting net returns isn’t just a mechanical exercise. In the sections that follow, we’ll unpack these challenges and walk through how to present net-of-fee performance in a way that remains meaningful, transparent, and fit for its intended audience.

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How to Present Net Returns

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This is where judgment and documentation matters most.

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Not all “net” returns are created equal. Even under the SEC Marketing Rule, there is no single mandated definition of net performance—only a requirement that net performance be presented. Under the GIPS Standards, net-of-fee returns must be reduced by investment management fees.

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In practice, firms may deduct:

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• Advisory fees (asset-based investment management fees)
• Performance-based fees
• Custody fees
• Transaction costs

Two net-return series can look comparable on the surface while reflecting very different assumptions underneath. This lack of transparency is one of the main reasons institutional investors often require managers to be GIPS compliant—it simplifies comparison by requiring consistency in the assumptions used and how they are presented or additional disclosure when more fees are included in the calculation than what is required.

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And context matters. A higher fee may be perfectly reasonable if it reflects broader services such as tax or financial planning, holistic portfolio construction, or access to specialized strategies. The problem isn’t the fee itself, it’s failing to use a fee scenario that is relevant to the user of the report.

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Deciding Between Actual vs Model Fees

The next hurdle is deciding whether to use actual fees or a model fee when calculating net returns. Historically, firms most often relied on actual fees, viewing them as the best representation of what clients actually experienced. But that approach raises an important question: are those historical fees still relevant to what an investor would pay today? If the answer is no, a model fee may provide a more representative picture of current expected outcomes. Under the SEC marketing rule, there are cases where firms are required to use a model fee when the anticipated fee is higher than actual fees charged.

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This consideration becomes even more important for strategies or composites that include accounts paying little or no fee at all. While the GIPS Standards and the SEC Marketing Rule are not perfectly aligned on this topic, they agree in principle—net performance should be meaningful, not misleading, and should reflect what an actual fee-paying investor should reasonably expect to pay. Thus, many firms opt to present model fee performance to avoid violating the marketing rule’s general prohibitions. [2]

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Additional SEC guidance published on Jan 15, 2026 on the Use of Model Fees reinforced that the decision to use model vs actual fees is context-dependent. While the marketing rule allows net performance to be calculated using either actual or model fees, there are cases where the use of actual fees may be misleading. The SEC emphasized flexibility and that while both fee types are allowed, what’s appropriate depends on the facts and circumstances of the situation, including the clarity of disclosures and how fee assumptions are explained.

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Which Model Fee Should Be Used?

Most firms offer multiple fee structures, typically based on account size, but sometimes also on investor type (institutional versus retail clients). That variability makes fee selection a key decision when presenting net performance.

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If you plan to use a single performance document for broad or mass marketing, best practice—and what the SEC Marketing Rule effectively requires—is to calculate net returns using the highest anticipated fee that could reasonably apply to the intended audience. This helps ensure the presentation is not misleading by overstating what an investor might take home.

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A common pushback is: “But the highest fee isn’t relevant to this type of investor.” And that may be true. In those cases, firms have a few defensible options:

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• Create separate versions of the presentation tailored to different investor types, or
• Present multiple fee tiers within the same document, clearly explaining what each tier represents

Either approach can work—but only if disclosures are explicit and easy to understand. When multiple fee structures are shown, clarity isn’t optional; it’s essential.

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In practice, many firms maintain separate retail and institutional versions of factsheets or pitchbooks. That approach is perfectly reasonable, but it comes with operational risk. If this becomes standard practice, firms need strong internal controls to ensure the right presentation reaches the right audience. That means:

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• Clear internal policies
• Consistent naming and version control
• Training marketing and sales teams on when each version may be used

This often involves an overlap of both marketing and compliance to get it right because getting the fee right is only part of the equation. Making sure the presentation is used appropriately is just as important to ensuring net performance remains meaningful, compliant, and credible.

‍

Which Statistics Can Be Shown Gross-of-Fees?

Since the introduction of the SEC Marketing Rule, there has been significant debate about whether all statistics must be presented net-of-fees—or whether certain metrics can still be shown gross-of-fees. Helpful clarity arrived in an SEC FAQ released on March 19, 2025, which confirmed that not all portfolio characteristics need to be presented net-of-fees. The examples cited included risk statistics such as the Sharpe and Sortino ratios, attribution results, and similar metrics that are often calculated gross-of-fees to avoid the “noise” introduced by fee deductions.

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The staff acknowledged that presenting some of these characteristics net-of-fees may be impractical or even misleading. As long as firms prominently present the portfolio’s total gross and net performance incompliance with the rule (i.e., prescribed time periods 1, 5, 10 years),clearly label these characteristics as gross, and explain how they are calculated, the SEC indicated it would generally not recommend enforcement action.

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Bringing it all Together

On paper, presenting net and gross performance should be a straight forward exercise.

In reality, layers of regulation, evolving expectations, and heightened scrutiny have made it feel far more complicated than it needs to be. But complexity doesn’t have to lead to confusion.

When firms are clear about:

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• Who they are communicating with,
• What that audience expects,
• What the performance is intended to represent, and
• Why certain assumptions were chosen

…the decisions around what gets presented become far more manageable.

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Net returns aren’t about finding a single “correct” number. They’re about telling an honest, well-documented story. And when that story is clear, investors don’t just understand the performance—they trust it.

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[1] 2020 GIPS® Standards for Firms, Section 2: Input Data and Calculation Methodology(gross-of-fees returns and treatment of transaction costs, including bundled fees).

[2] See SEC Marketing Rule 2 026(4)-1(a) footnote 590 as well as the SEC updated FAQ from January 15, 2026. Available at: https://www.sec.gov/rules-regulations/staff-guidance/division-investment-management-frequently-asked-questions/marketing-compliance-frequently-asked-questions

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In most investment firms, performance calculation is treated like a math problem: get the numbers right, double-check the formulas, and move on. And to be clear—that part matters. A lot.

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But here’s the truth many firms eventually discover: perfectly calculated performance can still be poorly communicated.

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And when that happens, clients don’t gain confidence. Consultants don’t “get” the strategy. Prospects walk away unconvinced. Not because the returns were wrong—but because the story was missing.

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Calculation Is Technical. Communication Is Human.

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Performance calculation is about precision. Performance communication is about understanding.

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The two overlap, but they are not the same skill set.

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You can calculate a composite’s time-weighted return flawlessly, in line with the Global Investment Performance Standards (GIPS®), using best-in-class methodologies. Yet if the only thing your audience walks away with is “we beat the benchmark,” you’ve left most of the value on the table.

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This gap shows up all the time:

• A client sees strong long-term returns but fixates on one bad quarter.
• A consultant compares two managers with similar returns and can’t tell what truly differentiates them.
• A prospect asks, “But how did you generate these results?”—and the answer is a wall of statistics.

The math is necessary. It’s just not sufficient.

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Returns Answer What. Clients Care About Why.

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Returns tell us what happened. Clients want to know why it happened—and whether it’s likely to happen again.

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That’s where communication comes in. Good performance communication connects returns to:

• The investment philosophy
• The decision-making process
• The risks taken (and avoided)
• The type of prospect the strategy is designed for

This is exactly why performance evaluation doesn’t stop at returns in the CFA Institute’s CIPM curriculum. Measurement, attribution, and appraisal are distinct steps fora reason—each adds context that raw performance alone cannot provide. Without that context, returns become just numbers on a page.

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The Role of Standards: Necessary, Not Narrative

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The GIPS Standards exist to ensure performance is fairly represented and fully disclosed. They do an excellent job of standardizing how performance is calculated and what must be presented. But GIPS compliance doesn’t automatically make performance meaningful to the reader.

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A GIPS Report answers questions like:

• What was the annual return of the composite?
• What was the annual return of the composite’s benchmark?
• How volatile was the strategy compared to the benchmark?

It does not answer:

• Why did this strategy struggle in down markets?
• What risks did the manager consciously take?
• How should an allocator think about using this strategy in a broader portfolio?

That’s not a flaw in the standards, it’s a reminder that communication sits on top of compliance, not inside it.

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Risk Statistics: Where Stories Start (or Die)

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One of the most common communication missteps is overloading clients with risk statistics without explaining what they actually mean or how they can be used to assess the active decisions made in your investment process.

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Sharpe ratios, capture ratios, alpha, beta—they’re powerful information. But without interpretation, they’re just numbers.

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For example:

• A downside capture ratio below 100% isn’t impressive on its own.
• It becomes compelling when you explain how intentionally implemented downside protection was achieved and what trade-offs were accepted in strong up-markets.

This is where performance communication turns data into insight—connecting risk statistics back to portfolio construction and decision-making. Too often, managers select statistics because they look good or because they’ve seen them used elsewhere, rather than because they align with their investment process and demonstrate how their active decisions add value. The most effective communicators use risk statistics intentionally, in the context of what they are trying to deliver to the investor.

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We often see firms change the statistics show Your most powerful story may come from when your statistics show you’ve missed the mark. Explaining why and how you are correcting course demonstrates discipline, self-awareness and control.

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Know Your Audience Before You Tell the Story

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Before you dive into risk statistics, every manager should be asking themselves about their audience. This is where performance communication becomes strategic. Who are you actually talking to? The right performance story depends entirely on your target audience.

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Institutional Prospects

Institutional clients and consultants often expect:

• Detailed risk statistics
• Benchmark-relative analysis
• Attribution and metrics that demonstrate consistency
• Clear articulation of where the strategy fits in a portfolio

They want to understand process, discipline, and risk control. Performance data must be presented with precision and context –grounded in methodology, repeatability and portfolio role. Often, GIPS compliance is a must. Speaking their language builds credibility and demonstrates that you respect the rigor of their decision-making process. It shows that you understand how they evaluate managers and that you are prepared to stand behind your process.

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Retail or High-Net-Worth Individuals

Many individual investors don’t care about alpha or capture ratios in isolation. What they really want to know is:

• Will this help me retire comfortably?
• Can I afford that second home?
• How confident should I feel during market downturns?

For this audience, the same performance data must be framed differently—around goals, outcomes, and peace of mind. Sharing how you track and report on these goals in your communication goes a long way in building trust. It signals that you are committed to their goals and will hold yourself accountable to them.  It reassures them that you are not just managing money, you’re protecting the lifestyle they are building.

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Keep in mind that cultural differences also shape expectations. For example, US-based investors are primarily results oriented, while investors in Japan often expect deeper transparency into the process and inputs, wanting to understand and validate how those results were achieved.

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Same Numbers. Different Story.

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The mistake many firms make is assuming one performance narrative works for everyone. It doesn’t. Effective communication adapts:

• The statistics you emphasize
• The language you use
• The level of detail you provide
• The context you wrap around the results

The goal isn’t to simplify the truth, it’s to translate it to ensure it resonates with the person on the other side of the table.

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The Best Performance Reports Tell a Coherent Story

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Strong performance communication does three things well:

1. It sets expectations
   Before showing numbers, it reminds the reader what the strategy is     designed to do—and just as importantly, what it’s not designed to     do.
2. It     explains outcomes
       Attribution, risk metrics, and market context are used selectively to     explain results, not overwhelm the reader.
3. It reinforces discipline
   Good communication shows consistency between philosophy, process, and performance—especially during periods of underperformance.

This doesn’t mean dumbing anything down. It means respecting the audience enough to guide them through the data.

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Calculation Builds Credibility. Communication Builds Confidence.

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Performance calculation earns you a seat at the table.
Performance communication earns trust.

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Firms that master both don’t just report results—they help clients understand them, evaluate them, and believe in them.

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In an industry where numbers are everywhere, clarity is often the true differentiator.