GIPS 2020: What’s Changing and What You Should Do (Updated July 2019)

It has been a busy couple of weeks for GIPS! On August 31st, the Exposure Draft of the 2020 Global Investment Performance Standards (GIPS®) was released for public comment and last week (September 14th and 15th) was the GIPS conference. With this exposure draft being released only two weeks before the conference, the forthcoming changes to the GIPS standards were the highlight of the event.

UPDATE: Notes have been added in red to clarify what has been adopted or modified now that the 2020 GIPS standards have been published.


Why are changes to the GIPS standards necessary?

The three primary reasons GIPS standards are being revised is to make them:

  1. Easier to understand: GIPS compliant firms are required to comply with all of the requirements of GIPS, including issues addressed in Guidance Statements and Q&A’s. Since the 2010 Standards were published, there have been several new Guidance Statements and many Q&A’s issued, which can be difficult for firms to follow. The GIPS 2020 re-write of the Standards is reorganized to avoid having to refer to several different sources to understand what is required.
  2. More relevant for different types of investors: GIPS was intended to be a global standard that is applicable to any type of investment manager, regardless of location or type of investment strategy managed. Despite this intention, GIPS has historically been focused on presenting composite performance, which is only really relevant when marketing a strategy to prospective segregated account investors. GIPS 2020 differentiates between marketing a strategy to potential segregated account investors versus marketing an established pooled fund to prospective fund investors. It also separates out the requirements for Asset Owners who present performance to their oversight board instead of prospective investors.
  3. More consistent across asset classes: In some cases, the Standards have been overly focused on asset class in specifying calculation methodology and valuation requirements where investment vehicle structure and external cash flow control are perhaps more important than the underlying investments. By removing asset class specific requirements for private equity and real estate, the Standards can be applied more appropriately and in a more consistent manner.


What is changing with GIPS?

To be clear, nothing is changing yet. The purpose of the exposure draft is to introduce proposed changes. We are all invited to provide comments during the public comment period (open through December 31, 2018) to ensure our voices are heard before any of these proposed changes become official. Below are some highlights of the most significant proposed changes:

Asset Owners 

While this is largely just a formatting change, the reorganization of how the requirements for Asset Owners are documented will make it significantly easier for Asset Owners to understand and apply GIPS to their organizations. Specifically, GIPS 2020 separates the requirements for Investment Management Firms and Asset Owners, allowing each type of firm to review the provisions applicable to them and see all requirements in one place. Since there are many redundancies between the two sections, this makes the Standards much longer, but easier to read since only the sections of the provisions applicable to them needs to be reviewed. Previously, Asset Owners were required to start with the Standards that were written for investment managers and then remove or adjust the requirements that were not applicable for them. It is now easier for Asset Owners to understand what applies.

UPDATE: This change was adopted as part of the 2020 GIPS standards.

Managers of Pooled Funds 

Previously, GIPS compliant firms were required to create composites for pooled funds even if the pooled fund would be the only constituent of the composite. GIPS 2020 no longer requires these composites to be created. Managers of limited distribution pooled funds will instead create a GIPS Pooled Fund Report that presents the information of the fund itself for prospective investors together with required GIPS disclosures for this type of report. Managers of broadly distributed pooled funds are not required to create a special report for GIPS. This will save managers of pooled funds a lot of time and effort and will allow them to create meaningful presentations focused on the funds themselves rather than creating composites that would likely never be used.

UPDATE: This change was adopted as part of the 2020 GIPS standards.

Option to present MWR

Previously, only Private Equity funds presented Money-Weighted Returns (“MWR”) (a.k.a. Internal Rates of Return (“IRR”)). GIPS 2020 removes all asset class specific rules and focuses more on the structure of cash flows and the type of vehicle used. For example, under GIPS 2020, if a firm manages a closed end fund where they control the external cash flows, they will have the option to present MWR instead of TWR, regardless of the type of underlying investments being made. In cases where the manager controls the timing and amount of the cash flows rather than the client, MWR is likely a more meaningful performance measure since it does not remove the effect of the cash flows the way TWR does.

UPDATE: This change was adopted as part of the 2020 GIPS standards.

Valuation Requirements

Previously only the Real Estate provisions included a requirement for external valuations. Since all asset class specific rules have been removed, the external valuation requirement now applies to all private market investments. To make this manageable, what is accepted as an “external valuation” has been loosened to include annual financial statement audits. This means that as long as the fund is audited, no separate external valuation should be required.

UPDATE: This was NOT fully adopted. Private market investments are now RECOMMENDED to have an external valuation at least every 12 months; however, real estate investments included in a real estate open-end fund are still required to have external valuations at least every 12 months. Real estate investments that are not included in real estate open-end funds are required to have an external valuation at least every 12 months unless the client agrees to a less frequent external valuation (minimum of every 36 months) OR, instead of the external valuation, the real estate investment can be subject to an annual financial statement audit.

Carve-outs

That’s right, carve-outs are back! Firms that spent a lot of time and money revising their composites when carve-outs were disallowed in 2010 may not be happy to hear this, but this is likely good news for wealth management firms with balanced accounts that want to market asset class specific strategies. It is not yet clear whether carve-outs can be built historically covering the period they were disallowed (2010 – 2020), but this was discussed at the GIPS conference and we expect it to be clarified.

UPDATE: This change was adopted as part of the 2020 GIPS standards and updates can be made for historical periods once the firm has adopted the 2020 GIPS standards.

Portability

Under the current Standards, GIPS requires firms to link prior track records to ongoing performance if all of the portability requirements are met. GIPS 2020 proposes to make the linking of historical performance optional.

UPDATE: This change was adopted as part of the 2020 GIPS standards.

Advisory-Only Assets

Firms are required to report total firm assets that include the assets of both discretionary and non-discretionary portfolios. GIPS 2020 clarifies that advisory-only assets cannot be presented as a part of total firm assets, but may be presented separately. With the growth of Unified Managed Account (UMA) platforms, many firms’ assets are shifting to the “advisory-only” category. Although presented separately from total firm assets, being able to present these advisory-only assets will allow firms with a large UMA business to demonstrate the amount of assets invested in their models.

UPDATE: This change was adopted as part of the 2020 GIPS standards.

Deadline to Update GIPS Presentations

GIPS Composite Reports (formerly known as Compliant Presentations) will need to be updated with the latest annual statistics within 6 months after the annual period ends. This won’t be an issue for most firms, but firms who prefer to have their verification complete prior to updating their presentations may struggle to get this updated in time.

UPDATE: A deadline to update GIPS Reports was adopted as part of the 2020 GIPS standards; however, a more reasonable 12 months after the annual period ends was set instead of the proposed 6 month deadline.

Sunset Provisions for Select Disclosures

GIPS 2020 will allow some disclosures, such as disclosures of benchmark changes or material events to be removed when they are no longer relevant for current prospects.

UPDATE: This change was adopted as part of the 2020 GIPS standards.

Additional Statistic in GIPS Presentations

GIPS 2020 will require a 3-year annualized return to be presented for both the composite and benchmark. GIPS already requires the 3-year annualized ex post standard deviation to be presented for the composite and benchmark, so this provides the return that matches the periods included in the standard deviation calculation.

UPDATE: This change was NOT adopted as a requirement of the 2020 GIPS standards, but was instead adopted as a recommendation.

Estimated Transaction Costs

Previously, the use of estimated transaction costs was prohibited. Because of this, many wrap managers, or managers of accounts with asset-based transaction fees that do not reduce gross-of-fee returns, are required to present their gross-of-fee returns as supplemental information. As long as these firms are able to estimate the transaction costs and support that the estimated costs result in gross-of-fee performance that is lower than when using actual transaction costs, these managers will be able to present gross-of-fee returns without the supplemental disclosures under GIPS 2020.

UPDATE: This change was adopted as part of the 2020 GIPS standards; however, the requirement for calculating returns that are more conservative when using estimated transaction costs was removed because it may be too difficult to prove. It was clarified that estimated transaction costs may only be used when actual transaction costs are unknown. Guidance on how to determine estimated transaction costs will be included in the Handbook, which is expected to be published by the end of 2019.

Revised Advertising Guidelines

GIPS 2020 takes a broader approach to the Advertising Guidelines to include advertisements to Pooled Fund Investors and Asset Owners rather than only for composites intended for Segregated Account Investors. Additionally, the requirements were loosened by changing some of the previously required disclosures to recommendations and by increasing the options for performance periods presented.

UPDATE: This change was adopted as part of the 2020 GIPS standards.

What action should be taken now?

 

UPDATE: The 2020 GIPS standards are now published. Please see our latest blog “2020 GIPS Standards: Prepare for the Changes to help your firm determine what steps you need to take to comply with the 2020 edition of the GIPS Standards.

The changes listed above are a sample of the most significant changes. If you are concerned about the changes, I would strongly encourage you to review the full exposure draft and provide comments to the GIPS Executive Committee. Read the full Exposure draft and provide any comments to the following email: standards@cfainstitute.org. Comments must be submitted by December 31, 2018.

Please note that the exposure draft contains 47 specific questions that the GIPS Executive Committee would like feedback on prior to finalizing the changes. You can provide comments on as many or as few of those questions as you like. Additionally, you can feel free to provide comments on any aspect of the Standards even if not related to one of the questions posed. Keep in mind that providing positive responses to what you do like is as important as providing critical feedback. If only critical feedback is provided, there is the risk that changes could be made based on the critical responses received that actually represent a minority of the stakeholders’ opinions since they did not hear the positive support for the change.

Questions?

If you have questions about GIPS 2020 or the Standards in general, we would love to talk to you. Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping firms maintain their compliance with GIPS on an ongoing basis. Please feel free to email Sean Gilligan directly at sean@longspeakadvisory.com.

How to Advertise as a GIPS Compliant Firm

Most GIPS compliant firms are aware of the requirement to provide their compliant presentations to prospective clients, but it can be a little confusing how to reference GIPS in other materials.

It is important to remember that you should never just casually reference your firm’s GIPS compliance without considering what disclosures are required to accompany that claim of compliance. Specifically, if you are creating an advertisement (any material meant for a broad audience, generally designed to attract people to become prospective clients of your firm), you have the following three options:

  • Don’t mention GIPS at all.
  • Mention GIPS and include a compliant presentation with all required GIPS disclosures.
  • Mention GIPS and follow the more abbreviated requirements of the GIPS Advertising Guidelines.

Why do some GIPS Compliant firms avoid mentioning GIPS?

One reason firms choose not to mention GIPS in an advertisement is due to space constraints or the logistics of fitting the required disclosures without looking awkward. For example, firms often try to keep factsheets to one page. If including the claim of GIPS compliance and related disclosures would push the presentation to a second page then the firm may elect not to mention GIPS.

Unfortunately, another common reason GIPS compliant firms choose not to mention GIPS in advertisements is out of fear of doing it wrong. After all the hard work you put in to become GIPS compliant, you should definitely be able to reference GIPS in your advertisements without fear! The information provided below explains how you can confidently make reference to your firm’s GIPS compliance in advertisements.


The Two Options When Mentioning GIPS

Option 1: Include a Compliant Presentation

Compliant presentations include all statistics and disclosures for a composite that are required to be provided to your firm’s prospective clients. While this document is most often used in a one-on-one setting with prospective clients, it can be attached to advertisements that mention GIPS as well.

In some cases, it can be easier to attach the compliant presentation rather than trying to incorporate the advertising disclosures directly into the advertisement. For example, if emailing a newsletter (considered a type of advertisement) and your firm wants to mention GIPS in the letter, you could include the compliant presentation as an attachment to the email rather than trying to fit the advertising disclosures into the newsletter itself. Making a reference to the attached GIPS compliant presentation may be cleaner than adding disclosures directly into the newsletter itself.

Also, many firms looking to add a reference to their GIPS compliance on their website (also considered a type of advertisement) will simply add a link to their compliant presentations rather than putting the advertising disclosures directly on the website. This way, you can simply add a link to the detailed information for each composite rather than adding disclosures referencing who to contact to receive a copy of the disclosures, etc., which is required by the GIPS Advertising Guidelines.


Option 2: Follow the GIPS Advertising Guidelines

Following the GIPS Advertising Guidelines allows a firm to mention GIPS in an advertisement with a more abbreviated set of disclosures than what is required for a compliant presentation. This is the most common option firms follow when they want to mention GIPS in a print ad or press release where attaching a compliant presentation would not be feasible.

The disclosures required by the GIPS Advertising Guidelines are different depending on whether performance is included in the advertisement or not. If you elect to follow the GIPS Advertising Guidelines, we recommend that you use our Required Disclosures for GIPS Compliant Advertisements checklist. This list can greatly assist in helping your firm confidently reference GIPS compliance in all of your advertisements.


Want to learn more?

If you have questions about the GIPS standards, we would be love to talk to you. Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping firms maintain their compliance with GIPS on an ongoing basis. Please contact us or email Sean Gilligan directly at sean@longspeakadvisory.com.

Creating GIPS Compliant Presentations

Firms that are GIPS compliant are required to provide all prospective clients with a GIPS compliant presentation. Typically, each composite has its own separate one-page sheet that includes all the statistics and disclosures required for that composite. This one-page sheet can be attached as an appendix to your firm’s pitchbooks and other marketing materials to properly represent your firm to the public as a GIPS compliant firm.

Not all compliant presentations are the same. Your firm’s required statistics and disclosures will depend on your firm’s strategies and policies. In this article, we discuss the required statistics and disclosures applicable to most GIPS compliant firms. In addition, we provide information on common issues firms face when creating compliant presentations and what you might be able to do to avoid them.


Required GIPS Statistics

Although additional statistics may be required, the following are the most common statistics that GIPS compliant firms are required to present in their compliant presentations:

  • Annual composite time-weighted returns (gross and/or net) – GIPS recommends the use of gross-of-fee returns; however, at least in the United States, it is most common to include both gross and net-of-fee returns. Net returns can be based on actual management fees or a model fee. As discussed in a previous post titled “Are fee-related administrative issues causing errors in your investment performance?” using a model fee instead of actual fees may be necessary when you have clients that pay fees from an outside source (e.g., by check or from another account your firm manages for them).
  • Annual benchmark returns – GIPS requires the use of a benchmark unless you are able to disclose a reason why no meaningful benchmark is available. Even if your strategy is benchmark agnostic, most firms choose to include the most relevant benchmark available and then disclose any material differences between the benchmark and the strategy.
  • Number of portfolios in the composite as of each year-end – This is simply the number of portfolios that are included in the composite as of 31 December each year.
  • Total assets in the composite as of each year-end – This is simply the sum of the composite assets as of 31 December each year.
  • Total assets of the GIPS firm as of each year-end – This is the sum of all discretionary and non-discretionary portfolio assets that are included in the firm definition as of 31 December each year.
  • A measure of internal dispersion for each annual period – Internal dispersion is a measure used to give the user of the performance report an indication as to how tightly the strategy is managed. In other words, if you are reporting that the composite return was 10% for the most recent annual period, a low internal dispersion figure will tell the user that most portfolios in the composite returned approximately 10%. High dispersion would indicate that the portfolios in the composite had a more diverse set of returns (e.g., perhaps some returned 5% while others returned 15%). Typically, firms use standard deviation to present this, which can either be calculated on an equal-weighted or asset-weighted basis.
  • Three-year annualized ex-post standard deviation of both the composite and the benchmark based on monthly returns – This is a measure of risk. The standard deviation of the composite’s monthly returns and the benchmark’s monthly returns provides the user of the performance report an idea of the level of risk taken compared to the benchmark. Ideally, you want higher annual returns and lower annualized standard deviation compared to the composite’s benchmark. That would indicate that you were able to outperform while taking less risk. For composites where a different measure of risk would be more meaningful than standard deviation, firms may present an additional risk measure with an explanation as to why that measure is more relevant, but the annualized standard deviation must still be included.

Other statistics may also be required if, for example, your firm manages non-fee-paying or bundled-fee accounts. Firms with these types of accounts must show the percentage of the composite they represent as of each year-end. Firms with private equity or real estate composites also require different statistics which can be found in the Real Estate and Private Equity provisions of the GIPS Standards.


Required Disclosures

When reviewing compliant presentations before distribution, many firms focus purely on the statistics presented to ensure material errors do not exist. This is often done without realizing that missing or incorrect disclosures can also be considered a material error. Thus, you’ll want to make sure your review process incorporates an evaluation of both.

The disclosures that must be included in a GIPS compliant presentation will differ by firm and by composite. Rather than listing all of them here, we have compiled a checklist of required GIPS disclosures which can be used as part of your firm’s marketing material review process. This checklist can be used to help you incorporate the proper disclosures for each compliant presentation prior to approving them for external use.

When reviewing the disclosures included in your firm’s GIPS compliant presentations, it is important to ensure:

  1. No required disclosures are missing.
  2. The disclosures are consistent with the policies documented in your GIPS Policies and Procedures document (“GIPS P&P”), including any recent changes to policies. For example, if a minimum asset level is changed for a composite, it is important to ensure that this change is consistently:
    1. documented in your firm’s GIPS P&P,
    2. implemented in the actual composite construction, and
    3. disclosed in the GIPS compliant presentation.
  3. Any disclosures (such as the claim of compliance) that are required to be written word-for-word as stated in the standards, are not modified in any way.

Common Issues

Firms that do not have composite maintenance software or an external GIPS consultant to create their GIPS compliant presentations often create them manually. When creating and updating compliant presentations yourself, it is important to avoid theses common mistakes:

  1. Don’t double count assets. For example, if the same portfolio is included in more than one composite you will not be able to sum your composite assets to get to your total GIPS firm assets. Additionally, if you manage a fund and then some of the separate accounts you manage invest in that fund as part of their portfolio, you need to ensure you do not count those assets both as part of the fund and again as part of the separate accounts. It is also important to ensure that only actual accounts are included. Models and anything that is considered “advisory-only” should be excluded from your calculation.
  2. Ensure that the number of portfolios reported is the total number of portfolios included in the composite as of 31 December of that year. Since internal dispersion is calculated based on only the portfolios that were in the composite for the full year, some firms make the mistake of reporting their number of portfolios as just the number of portfolios that were included for the full year. This is not correct as this statistic is intended to be the total number of portfolios in the composite as of each year-end.
  3. When partial-year performance is presented, it is important to:
    1. Clearly label the period for which performance is presented.
    2. Match the benchmark period to the period presented for the composite.
  4. Keep your presentations up-to-date. This means:
    1. Updating presentations with corrected statistics if corrections are made to the composite’s data. For example, firms may make updates to transactions for reconciliation purposes, such as backdating dividends. If this results in a change to composite-level statistics, then the compliant presentations must be updated accordingly. It is important to consistently follow your firm’s GIPS error correction policy. Typically, immaterial changes to the statistics are updated for future use even if the changes are not large enough to trigger redistribution of the presentation.
    2. Updating presentations with the most recent year’s statistics as soon as they become available. It is not necessary to wait for the verification to be complete before adding and presenting updated statistics. For example, if your annual GIPS verification for calendar year 2017 will not be complete until mid-2018, you do not need to wait until the verification is complete to present the 2017 statistics in your compliant presentation. You just cannot update the date your firm is verified through until the verification report is issued (i.e., you can present unverified statistics for the 2017 period, but the date range of your verification will still be disclosed as ending 31 December 2016). This lets the user of your compliant presentation have the latest statistics while letting them know that the verification for the latest period is pending.
  5. Ensure there are no typos if you are manually entering the statistics into a table. Typos can easily cause material errors that would trigger the need for redistribution of the presentation with disclosure of the error. Establishing a simple review process can help your firm avoid this headache.
  6. Make sure the information for each composite is entered into the correct compliant presentation (i.e., ensure you do not enter the statistics for Composite A into the presentation for Composite B). Seems obvious, but you’d be surprise how often this mistake is made. Again, a reliable review process can help your firm avoid these mistakes.

Want to Learn More?

If you have any questions about creating compliant presentations or any GIPS statistics or disclosures, we would love to help. Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping them maintain compliance with the GIPS Standards on an ongoing basis. Contact us to learn how we can help.

How to Construct Composites

GIPS compliant firms are required to calculate and present composite performance, rather than presenting the performance of a model or single representative account. The purpose of this is to ensure investment managers are presenting an accurate representation of their ability to implement a strategy, rather than “cherry-picking” their best performing portfolio. As discussed in our previous 2-part blog post, about how to create a GIPS Policies & Procedures Document, composites must be defined based on the strategies your firm manages. Once your composites are defined and composite rules established, you are then ready to construct your composites.



Organize Portfolios by Strategy

A composite is an aggregation of portfolios with similar objectives. The first step in constructing composites is to group all of the portfolios your firm manages by strategy, which will later be refined by applying composite rules. Strategies can be as broadly or narrowly defined as you like as long as the resulting performance statistics are meaningful. If you are not sure how to define your firm’s strategies, you should consult with a GIPS expert to ensure the definitions maximize the marketing opportunities available to your firm. Most importantly, you should ensure that they are:

  1. Representative of how your strategies are managed and how you intend to market your firm’s offerings.
  2. Broad enough to have sufficient assets that may be required to attract certain institutional investors.
  3. Narrow enough that the dispersion is low and the performance results are meaningful.
  4. Easily comparable to the strategies marketed by your firm’s closest competitors.

When grouping your portfolios into strategies, you must consider both the portfolio’s current mandate as well as historical changes in your clients’ investment policy statements. If a portfolio’s strategy has changed since inception, you must check that it is grouped under the correct strategy both before and after the change.


Apply Composite Rules

Once portfolios are grouped by the strategy they followed for each period, you can then apply your firm’s composite rules established in your GIPS Policies and Procedures document (“GIPS P&P”) to create each strategy’s corresponding composite. For example, if you have a U.S. Large Cap Growth strategy, you can start by evaluating all of the portfolios that follow this strategy’s definition. If the portfolio meets your firm’s GIPS definition of discretion and does not break any other composite rule (such as minimum asset level), the portfolio can be added to your U.S. Large Cap Growth composite.

The timing of the portfolio’s inclusion in the composite will be based on the inclusion policy set in your firm’s GIPS P&P (e.g., the first full month after the portfolio is funded or the first full month after the portfolio is at least X% invested). The portfolio will then remain in the composite until discretion to implement this strategy is lost, at which point the portfolio will be excluded from the composite based on the exclusion policy set in your firm’s GIPS P&P (e.g., the end of the last full month before discretion was lost).


Discretion to implement this strategy can be lost one of the following ways:

  1. The client adds a restriction to the portfolio causing it to no longer meet your firm’s definition of discretion – The portfolio becomes non-discretionary until the restriction is lifted or until the restriction no longer interferes with the implementation of the strategy.
  2. The client notifies your firm that they will be terminating your management of the portfolio – The portfolio is closing and is considered non-discretionary until the assets transfer out.
  3. The client requests a change to a different strategy – The portfolio is temporarily non-discretionary as it is rebalanced to fit the new strategy, at which point it will enter the new strategy’s composite based on its inclusion policy documented in your firm’s GIPS P&P.
  4. The client makes a deposit or withdrawal of cash or securities that exceeds the composite’s defined “significant cash flow” threshold – The portfolio is temporarily non-discretionary as trading takes place to facilitate the client-requested cash flow and the portfolio will be re-included in the composite based on the timing documented in your firm’s significant cash flow policy.
  5. The portfolio’s market value drops below the composite’s documented minimum asset level – The portfolio becomes non-discretionary until the market value goes back above the composite’s minimum asset level, at which point the portfolio would be considered discretionary again and would be re-included in the composite based on the timing documented in your composite’s minimum asset level policy.

It is important to note that the first four of the five scenarios listed above are driven by client requests and the fifth is based on a predetermined policy. The removal of a portfolio from a composite cannot be based on changes made to a portfolio that are driven by the portfolio manager. If a portfolio manager makes a tactical shift in the strategy, such as holding higher cash because of current market conditions, this would be considered an evolution of the strategy definition rather than a reason to remove an account from the composite.


Conduct Tests Before Finalizing Compsites

The process of reviewing portfolios to ensure they are placed in the correct composite for the right time period can be difficult. Many firms rely on GIPS consultants or composite software to help test their composites to identify portfolios that break composite rules or exhibit outlier performance (indicating that a portfolio may not belong in the composite). Being proactive about composite testing allows you to make corrections before finalizing composite results for distribution or verification.

Best practice is to address these issues when building the composites rather than waiting for issues to be caught during the verification process. Often, when issues come up during verification, it leads to an increase in the verification testing sample size, resulting in more work and potentially more cost to complete the verification.


Calculate Composite Statistics

Once your composite membership is finalized, you can then calculate composite statistics. Specifically, you will need to calculate annual composite performance, a measure of internal dispersion, and three-year annualized ex-post standard deviation. The calculation methodology used must be consistent with the methodology described in your firm’s GIPS P&P.

We will discuss each of these statistical measures as well as well as the other figures and disclosures that must be included in a GIPS compliant presentation in the final part of this blog series “How to Create GIPS Compliant Presentations.” Please subscribe to our blog or follow us on social media to ensure you don’t miss the conclusion and to receive future GIPS and performance-related educational updates.


Want to Learn More?

If you have any questions about the GIPS Standards, we would love to help.  Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping them maintain compliance with the GIPS Standards on an ongoing basis. 

Part 2: Creating GIPS Policies and Procedures

Calculation Methodology, Books & Records, Composite Definitions & Rules, and Error Correction Policies

As discussed in Part 1 of this two part series, GIPS compliant firms are required to document how they comply with the GIPS requirements as well as any recommendations that the firm chooses to follow. This document acts as the firm’s internal representation of their GIPS compliance, and is intended to state the firm’s policies and describe the procedures the firm follows to maintain its compliance.

In Part 1 of this two part series we covered Firm Definition and Definition of Discretion. Now, in Part 2 we will cover calculation methodology, books and records, composite definitions and rules, as well as error correction policies.



Calculation Methodology

While GIPS provides a framework for how to calculate performance, firms may have different methods for handling external cash flows, asset-weighting portfolios, calculating dispersion, etc. The specifics of the methods used must be documented in the firm’s GIPS P&P. This section is typically broken down to separately discuss portfolio-level calculation methodology and composite-level calculation methodology.

The main consideration when establishing your firm’s portfolio-level methodology is the treatment of external cash flows. Since the start of 2010, GIPS requires firms to revalue for all “large” cash flows. It is up to your firm to define the term “large,” but it should be defined based on when your firm feels that estimation methods, such as Modified Dietz, lose their accuracy. Most portfolio accounting systems either value portfolios daily (essentially defining “large” as 0%) or value portfolios for all cash flows 10% or greater. Firms without a portfolio accounting system that are calculating their portfolio-level performance more manually (e.g., in Excel) frequently use 20%, but higher than that is less common.

With regard to composite-level performance, the most important information to document is the method used to asset-weight the portfolio returns to get the composite-level performance results. This is typically achieved through one of the following three methods:

  1. Asset-weight each individual portfolio’s return for the month based on each portfolio’s beginning market value and then sum the portfolios’ weighted returns to get the composite return for the month.
  2. Asset-weight each individual portfolio’s return for the month based on each portfolio’s beginning market value plus weighted cash flows and then sum the portfolios’ weighted returns to get the composite return for the month.
  3. Aggregate the underlying data of all portfolios in the composite and then calculate the performance for each month as if all of the aggregated data is for one large portfolio.

This section should also include information regarding how the other required GIPS statistics are calculated, such as dispersion and 3-year annualized ex post standard deviation. Here, it is important to note whether these statistics are calculated based on gross or net-of-fee returns, whether calculated by your portfolio accounting system or outside the system, (e.g., in Excel) and the specific standard deviation formula used to do the calculation (e.g., a population or sample based formula).


Policies Regarding Books and Records

Firms must be able to support all information included in GIPS compliant presentations as well as support that their client assets are real. This section of your GIPS P&P can outline the types of records that are maintained and in what format/location they are stored. Specifically, firms typically outline the types of documents they have (e.g., custodial statements, records maintained within a portfolio accounting system, printed records from a former portfolio accounting system such as holdings reports, transaction summaries, etc.). In this section, it is also important to mention whether files are hardcopy or electronic, whether they are maintained onsite or offsite, and if there is a limit to the amount of time they are saved.


Composite Definitions and Rules

irms must create policies to ensure that portfolios are placed in the appropriate composite for the correct time period. The timing of portfolio movement in or out of composites must be based on objective criteria that is outlined in this section of the firm’s GIPS P&P. For example, firms typically either set a policy based on the amount of time passed since discretion was granted or based on when the portfolio becomes “fully invested” – which must be clearly defined.

For example, if based on time, the policy may be written as, “portfolios are included in the composite at the start of the first full month under management.” If based on when the portfolio becomes fully invested, the policy may be written to state, “portfolios are included in the composite at the start of the first full month after the portfolio is at least 90% invested in line with the strategy.” The percentage set can be whatever your firm feels is appropriate, but you want to establish a clear threshold that can be followed. Simply stating “fully invested” is subjective and difficult to follow consistently.

Other rules can also be documented in this section such as minimum asset levels and significant cash flow thresholds, to keep portfolios out of composites during periods where the intended strategy cannot be fully implemented. Minimum asset levels set for GIPS composite purposes are different than minimums your firm may set for marketing purposes. While your firm can state any marketing minimum you wish based on the size portfolios you hope to attract, the minimum set for composite inclusion must be based on the minimum amount needed to fully implement that strategy. For example, even if your firm states that your strategy has a $1M minimum, portfolios accepted below this threshold must still be included in the composite if they can be managed the same as the portfolios over $1M. In this example, if you determine that below $500k you can no longer diversify the same way as you do for your larger portfolios, then $500k would be an appropriate minimum to set for composite inclusion purposes.

A significant cash flow policy can be established if your firm is concerned with very large cash flows moving in or out of a portfolio. Often these cash flows affect the portfolio’s performance and could distort the composite’s statistics. Firms wishing to implement a significant cash flow policy establish a threshold for the size of a cash flow (typically based on the percentage of the portfolio’s beginning of month market value) that would trigger the temporary removal of the portfolio from the composite while trading takes place to accommodate the cash flow.

This “significant” cash flow threshold is different than the “large” cash flow threshold discussed in the calculation methodology section. While the “large” cash flow threshold is set to improve the mathematical accuracy of the performance calculation, the “significant” cash flow threshold is based on the size of a cash flow that disrupts the actual management of the portfolio. Significant cash flows often lead to distorted performance figures that were out of the portfolio manager’s control in terms of timing or amount.


Error Correction Policies

Firms must create materiality thresholds that pre-determine the action required if errors occur in a compliant presentation. This section should include thresholds for all statistics as well as criteria for determining when errors in disclosures are material. Defining materiality thresholds can be difficult, but CFA Institute, in conjunction with the United States Investment Performance Committee (USIPC), conducted a GIPS error correction survey seeking information regarding the typical materiality thresholds used by GIPS compliant firms. We recommend reviewing the Executive Summary of this survey’s results to get an idea of the thresholds that have been set by your peers.

Typically, thresholds are set that define the level when an error becomes a material error. Anything above the threshold would require the firm to redistribute an amended GIPS compliant presentation to any prospective client or clients that relied on the erroneous presentation. This amended GIPS compliant presentation would also need to include a disclosure that explains the correction. Anything below the materiality threshold will only trigger a correction for future distributions, but no disclosure or redistribution of previously circulated presentations.


Want to Learn More?

If you have any questions about the GIPS Standards, we would love to help.  Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping them maintain compliance with the GIPS Standards on an ongoing basis. 

GIPS 20/20 Consultation Paper

The GIPS Executive Committee (“EC”) is preparing for a full re-write of the GIPS standards, which they are referring to as GIPS 20/20. It is referred to as GIPS 20/20 as it is a “vision” for the future of the standards and because it also is intended to be rolled out in the year 2020.

The EC has never put out a consultation paper of this kind before; typically the only opportunity to comment is after new guidance is already drafted. This is your opportunity to help shape the future of the standards by submitting your comments in response to the questions they pose in the consultation paper. To provide feedback, please send your comments to standards@cfainstitute.org by 16 July 2017.

The full GIPS 20/20 Consultation Paper is available on the GIPS Standards website. The areas of focus include:

  • The structure of the standards to ensure they are applicable to all types of investment managers as well as to asset owners
  • Specific treatment of pooled funds, to build on the Guidance Statement on Broadly Distributed Pooled Funds currently in place
  • Adjustments to the way asset-class specific guidance is structured in the standards (e.g., guidance specific to private equity and real estate)
  • Expanded use of internal rates of return (IRR) where appropriate
  • The frequency at which portfolios are required to be valued
  • Providing compliant presentations to existing clients and pooled fund investors
  • Options for reporting “advisory-only” assets (e.g., UMA) that do not currently fit within a firm’s assets under management (AUM)
  • The inclusion of non-fee paying portfolios in composites
  • References to the firm’s claim of GIPS compliance
  • Timeliness and frequency for updating compliant presentations
  • The use of estimated trading expenses
  • Whether any required statistics or disclosures can be removed as well as if any statistics or disclosures not currently required should be added

Whether you agree or disagree with the potential changes discussed, the EC greatly appreciates any feedback provided. If you only have an opinion on some of the topics, it is okay to respond to the portions you wish. Your response does not need to be formal and could even be a simple email.

We are in the process of composing our comments and strongly encourage you to do the same. If there are any aspects of the consultation paper you do not understand, feel free to contact us and we can help give you context or clarify the concerns involved.

Part 1: Creating GIPS Policies and Procedures

Firm Definition and Definition of Discretion

GIPS compliant firms are required to document how they comply with the GIPS requirements as well as any recommendations that the firm chooses to follow. This document acts as the firm’s internal representation of their GIPS compliance, and is intended to state the firm’s policies and describe the procedures the firm follows to maintain its compliance.



Many firms create their GIPS policies and procedures (“GIPS P&P”) from a template; however, unless this template is customized to address the unique circumstances of the firm, it will not sufficiently describe the firm’s actual practices in place to adhere to the GIPS requirements. Given that every firm has their own unique set of circumstances, we cannot cover every detail that your GIPS P&P should include, but we will cover the most important parts that every firm is required to document. Within Part 1 of this two part series we will focus on Firm Definition and Definition of Discretion. In Part 2 we will cover calculation methodology, books and records, composite definition, and error correction.


Firm Definition

The GIPS standards must be applied to your firm as a whole, not to a single product or strategy you manage. How your firm is defined for GIPS purposes is primarily based on how the firm is held out to the public, which may differ from the legal structure of your firm.

Most small and mid-sized investment managers define their firm for GIPS purposes the same as they are defined for legal and regulatory purposes. If you choose to define your firm more narrowly than the legal entity, it is important to ensure that you will be able to clearly and consistently hold yourself out to the public based on this more narrow definition. Most importantly, you must never imply that any part of your firm that falls outside of your GIPS Firm Definition is GIPS compliant.

Your GIPS P&P must include a written definition of your firm. This definition will then be provided as a disclosure in each of your firm’s GIPS compliant presentations. The following are a couple examples of how one might define their firm:

Example 1 – Firm Definition Matches Firm’s Regulatory Registration

ABC Asset Management, LLC is a registered investment advisor with the United States Securities and Exchange Commission in accordance with the Investment Advisors Act of 1940. ABC Asset Management, LLC manages equity and fixed income strategies for institutions and high net worth individuals.

Example 2 – Firm Defined More Narrowly than the Firm’s Regulatory Registration

ABC – Institutional is the Institutional Division of ABC Asset Management, LLC, which manages equity and fixed income strategies for institutional investors. ABC Asset Management, LLC is a registered investment adviser with the United States Securities and Exchange Commission in accordance with the Investment Advisers Act of 1940. ABC Asset Management, LLC also includes a wealth management division focused on managing customized portfolios for high net worth individuals. The institutional and wealth management divisions are held out to the public as separate entities and only the institutional division complies with the GIPS standards.


Definition of Discretion

One of the benefits of GIPS is that it helps your firm demonstrate its ability to manage each strategy that it offers. To ensure that your composite results truly reflect your portfolio manager’s decision-making process, it is important to include only the accounts that are free of material, client-mandated restrictions in your composites.

GIPS requires all discretionary, fee-paying portfolios to be included in at least one composite, while non-discretionary portfolios are excluded from composites. Within your GIPS P&P you can define how to determine the discretionary status of each account.

The term “discretion” is defined differently for GIPS than it typically is for legal or regulatory purposes. For example, you may have a discretionary contract for an account that you deem to be non-discretionary for GIPS purposes because of restrictions the client places on the implementation of the strategy. The definition of discretion section of your firm’s GIPS P&P should outline objective criteria for determining the discretionary status of accounts.

This section typically includes the types of restrictions that would cause an account to be deemed non-discretionary for GIPS purposes. Ideally, firms should include thresholds to ensure the policy can be followed consistently. For example:

  • Custom allocation requests that cause the portfolio’s asset allocation to deviate by more than 10% from the strategy’s target allocation.
  • Restricting the purchase or sale of certain securities that affects more than 10% of the portfolio.
  • Requests to hold cash at a level more than 5% above the current cash target.
  • Monthly, recurring cash flows regardless of size.
  • The use of margin, regardless of amount used.

As far as determining the thresholds to set, firms that manage their strategies very strictly to a model will typically have very low thresholds or even a 0% tolerance for deviations from their model. These deviations would trigger the portfolio to be deemed non-discretionary and excluded from the composite. Firms that allow for greater customization in their portfolio construction will typically have a higher tolerance for deviations.

When setting the criteria for determining discretion you’ll want to consider the following:

  1. A greater tolerance for deviations from the strategy’s holdings/allocation, will result in more portfolios in the composite (higher disclosed composite size), but dispersion (differences in performance between portfolios in the same composite) will also be higher.
  2. A lower tolerance for deviations results in tighter dispersion, but composite assets will be smaller and your firm’s number of non-discretionary accounts will be larger.

Your firm should find a balance that results in composite performance that meaningfully reflects the size and dispersion of your strategies.


Want to Learn More?

If you have any questions about the GIPS Standards, we would love to help.  Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping them maintain compliance with the GIPS Standards on an ongoing basis. 

How to Become GIPS Compliant

Many firms are interested in becoming GIPS compliant, but are intimidated by the initial process of bringing their firm into compliance. As long as you know the steps to become GIPS compliant and understand the options you have to complete each step, this process is very manageable. The information provided here is intended to provide you with a high-level overview of the steps you must complete to become GIPS compliant.



Before holding your firm out to the public as a GIPS compliant firm, there are three main steps that must first be completed. Firms must:

  1. Document GIPS policies and procedures
  2. Construct composites that consistently follow these policies and procedures
  3. Create compliant presentations to show the results of each composite

Document GIPS Policies and Procedures

Firms are required to document how they comply with the GIPS requirements as well as any recommendations that the firm chooses to follow in a document known as the firm’s GIPS Policies and Procedures (“GIPS P&P”). This document acts as the firm’s internal representation of their GIPS compliance, and is intended to state the firm’s GIPS policies as well as describe the procedures the firm follows to maintain their compliance. Examples of items typically found in this document include:

  • Firm Definition – GIPS is applied to your firm as a whole, not to a single product or strategy you manage. How your firm is defined for GIPS purposes is primarily based on how the firm is held out to the public, which may differ from the legal structure of your firm.
  • Definition of Discretion –Discretion is defined differently for GIPS than it typically is for legal or regulatory purposes. You may have a discretionary contract for an account that you deem to be non-discretionary for GIPS purposes because of restrictions the client places on the implementation of the strategy. The “Definition of Discretion” section of your firm’s GIPS P&P should outline objective criteria for determining the discretionary status of accounts.
  • Policies Regarding Books and Records – Firms must be able to support all information included in compliant presentations as well as support that their client assets are real. This section of your P&P can outline the types of records that are maintained and in what format/location they are stored.
  • Calculation Methodology – While GIPS provides a framework for how to calculate performance, firms may have different methods for handling external cash flows, asset-weighting accounts, calculating dispersion, etc. The specifics of the methods used must be documented in the firm’s GIPS P&P.
  • Composite Definitions and Rules – Firms must create policies to ensure that accounts are placed in the appropriate composite for the correct time period. The timing of the movement of accounts in or out of composites must be based on objective criteria that is outlined in this section of the firm’s GIPS P&P. Other optional rules, such as minimum account sizes and significant cash flow thresholds can also be documented here to keep accounts out of composites during periods where the intended strategy cannot be fully implemented.
  • Error Correction Policies – Firms must create materiality thresholds that pre-determine the action required if errors occur in a compliant presentation. This section should include thresholds for all statistics as well as criteria for determining when errors in disclosures are material.

Construct Composites

After the GIPS P&P is created, firms can use these policies to construct the composites defined in the policy document. To do this, firms must:

  1. Identify all of the accounts that meet the definition of a composite. In other words, group all accounts by strategy, but then remove accounts that do not meet the firm’s definition of discretion or that do not meet a composite-specific rule, such as a minimum account size.
  2. Determine the correct time to include each account as well as remove any account that closed, changed strategies, or otherwise caused you to lose discretion. Portfolios must only be included in composites for periods in which they were considered discretionary for GIPS purposes. This helps ensure that the composite results accurately represent the firm’s management of the composite’s strategy and does not include outside noise created from client-requested restrictions.
  3. Asset-weight the monthly account-level results for each account included in the composite to calculate the composite-level performance results.
  4. Calculate all required composite-level statistics (see the list below) that must be included in the composite’s compliant presentation.

Create Compliant Presentations

Compliant presentations act as the firm’s external representation of their GIPS compliance and must be provided to all prospective clients. Each composite has a separate presentation that includes all of the required statistics as well as the required disclosures. Statistics included in compliant presentations include:

  • Annual composite performance (gross and/or net)
  • Annual benchmark performance
  • Number of accounts in the composite as of each year-end
  • Total assets in the composite as of each year-end
  • Total assets of the GIPS firm as of each year-end
  • A measure of internal dispersion for each annual period
  • Three year annualized ex-post standard deviation of both the composite and the benchmark based on monthly returns

Other statistics may also be required such as the percentage of non-fee paying accounts or the percentage of bundled fee paying accounts as of each year-end, where applicable.


Want to Learn More?

If you have any questions about how to become GIPS Compliant, we would love to help.  Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping them maintain compliance with the GIPS Standards on an ongoing basis. 

What are the GIPS Standards?

The Global Investment Performance Standards (GIPS®) are an ethical framework that standardize how investment managers calculate and report their investment performance to prospective investors. Standardized presentations help ensure the information presented is meaningful, complete, and comparable to performance presentations of other GIPS compliant firms, regardless of location or regulatory jurisdiction.

This comparability helps simplify the due diligence process for prospective investors as it allows them to make an “apples-to-apples” comparison of similar strategies managed by different investment managers regardless of their location. Currently, there are 37 countries that have officially adopted GIPS, making it a true global standard.


Why are the GIPS Standards Necessary?

GIPS is designed to address potentially misleading practices employed by some investment managers when presenting investment performance to prospective clients. Examples of misleading practices include:

  • “Cherry-picking” accounts – Showing a strategy’s best performer as a representation of how the strategy performed as a whole
  • Using selective time periods – Presenting the performance of a strategy only for the period it performed the best
  • Utilizing model or back-tested results when results of actual managed accounts could have been used
  • Survivorship bias – Excluding accounts that have closed (often the worst performing accounts) from performance calculations

Under GIPS, discretionary accounts are grouped into composites based on the strategy they follow. Performance is then reported at the composite level, based on the aggregation of the accounts within the composite. Composites only include actual discretionary accounts, not models, and it is required to present each composite’s performance statistics for each annual period.

These requirements, implemented in conjunction with the rest of the GIPS requirements, help prevent compliant firms from manipulating their results and improve comparability between firms that are GIPS compliant and manage similar strategies.


Why Become GIPS Compliant?

GIPS compliance offers investment managers both marketing and compliance benefits.

According to eVestment, two out of three searches made in their database by investors or consultants are set to exclude firms that are not GIPS compliant. Being able to “check the box” in RFPs and consultant databases indicating that your firm is GIPS compliant can be a valuable marketing benefit.

Being GIPS compliant requires firms to document policies and procedures, addressing how their firm complies with all of the GIPS requirements as well as the recommendations they choose to adopt. The practice of documenting and implementing these policies is an excellent way to ensure your firm is consistent in its practices across the firm, which can be immensely valuable to your compliance department.


Misconceptions About GIPS that Discourage Managers from Complying

Misconception 1: GIPS Compliance is Burdensome and Expensive

The initial process of becoming compliant can be time consuming; however, if sufficient time is put in at the start of the process to create detailed GIPS policies and procedures and construct composites that consistently follow these policies, the ongoing maintenance is very manageable.

For firms that do not have the resources available internally to bring their firm into compliance, GIPS consulting firms such as ours, Longs Peak Advisory Services (“Longs Peak”), are available to assist with the creation of policy documents, construction of composites, the creation of compliant presentations, etc.

Verification is often the largest direct expense associated with GIPS compliance; however, having your firm verified is not required. If you choose to be verified, the marketing benefit received will likely outweigh the cost. If the cost of a verification is more than your firm can currently afford, you can always become complaint now and add verification at a later date when it fits more comfortably in your budget.

If a firm can comply with all of the GIPS requirements without the help of a GIPS consultant and elects not to have their compliance verified, there is no direct cost for a firm to be GIPS compliant.


Misconception 2: GIPS is Not Relevant for My Firm

As mentioned earlier, GIPS offers both marketing and compliance benefits. Even if you are not marketing your strategies to institutional investors that require their managers to be GIPS compliant, your firm can still benefit from GIPS. More specifically, if your firm:

Only manages funds:

It may seem pointless to create a composite of one account; however, when marketing a composite rather than the fund itself, adjustments can be made to the fund’s fees to make the performance results more representative of what a separate account would have experienced following your strategy. This composite performance could be used to market your strategy to prospective separate account investors or to help prospective clients compare your performance to a competitor whose performance is based on a composite of separate accounts.

Manages customized portfolios:

Even if you are not managing a strategy strictly to a model, composites can be built based on the risk level of the client. For example, many wealth management firms have Conservative, Moderate, Growth, and Aggressive composites. There may be some dispersion between accounts within each composite, but these composites at least give you the opportunity to present an aggregation of your actual accounts with similar risk and objective profiles.


Questions?

If you have questions about the GIPS standards, we would be love to talk to you. Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping firms maintain their compliance with GIPS on an ongoing basis. Please feel free to email Sean Gilligan directly at sean@longspeakadvisory.com.

Will the GIPS Guidance Statement on Broadly Distributed Pooled Funds affect your firm?

An Exposure Draft of the Global Investment Performance Standards’ (GIPS®) new Guidance Statement on Broadly Distributed Pooled Funds was recently published. The intention of this exposure draft is to seek comments from the public regarding this proposed new guidance before it is officially adopted in January of 2017.

Anyone with opinions regarding the guidance, especially with regard to questions the GIPS Technical Committee has included within the exposure draft, is encouraged to provide written feedback by 29 April 2016. Witten feedback can be submitted by emailing your comments to: standards@cfainstitute.org.



Who does the pooled fund guidance apply to?

Any GIPS compliant firm that manages and markets a “broadly distributed pooled vehicle” (which includes mutual funds or other similar vehicles) fits within the scope of this guidance.

If a firm is only responsible for managing the fund (e.g., as a sub-advisor), but has no responsibility for filing the fund’s official documents (e.g., the prospectus or KIID) or for creating fund-specific marketing materials, then this proposed guidance statement is not applicable.

The requirements set forth in the proposed guidance statement are specific to marketing pooled funds. Marketing pooled funds should not be confused with marketing a strategy or composite that contains a pooled fund. The guidance is specific to situations where the fund itself is being marketed to attract new investors within that fund.



What is the purpose of the proposed guidance?

GIPS requires firms to make every reasonable effort to provide compliant presentations to all prospective clients; however, most firms have historically interpreted this to only include new separate account prospective investors, not pooled fund investors that simply invest in a fund that is already included in a composite.

The purpose of this guidance statement is to ensure GIPS compliant firms are consistent in the way they present their pooled fund information to prospective investors. This consistency is intended to help prospective pooled fund investors make meaningful comparisons between funds. To achieve this, the exposure draft proposes requiring official fund documents, as well as all fund-specific marketing materials (i.e., materials that are specifically marketing the fund itself, not the strategy or composite), to include specific statistics and disclosures.



What does the proposed guidance require?

If adopted in its current form, the new guidance would require GIPS compliant firms to include the following in each of their funds’ official documents as well as any fund-specific marketing materials:

  1. A description of the fund’s objective or strategy.
  2. An indication of the risk involved in investing in the fund, which can be either qualitative or quantitative.
  3. Pooled fund returns calculated according to the methodology and time periods required by local laws or regulations. If local laws or regulations do not specify a methodology or time period then firms must present the fund’s returns net of all fees and expenses for periods that are acceptable based on the current GIPS Advertising Guidelines.
  4. Benchmark returns for the same periods that the fund’s performance is presented, as well as a description of the benchmark. If no appropriate benchmark exists, this can be disclosed in lieu of including benchmark performance.
  5. The currency used to express performance.

There is no requirement to mention GIPS or provide (or even offer) a compliant presentation. The guidance statement does recommend, however, that firms include the following claim of compliance in their fund’s official documents and fund-specific marketing materials: “XYZ Firm, the firm managing this pooled fund, claims compliance with the Global Investment Performance Standards (GIPS®). For more information about the GIPS standards, please visit www.gipsstandards.org.”

It is important to note that this claim of compliance is new and differs from the wording used in compliant presentations or materials adhering to the GIPS Advertising Guidelines. When claiming compliance, firms must ensure that the correct claim is used and is stated verbatim from the standards.



What can firms do now to prepare for this new guidance?

Firms managing pooled funds should first determine whether they fit within the scope of the proposed guidance. If so, then your firm should review its current official fund documents and fund-specific marketing materials to determine if changes are needed in order to meet the new requirements, if adopted.

If there are material changes that are not reasonably feasible for your firm, use this opportunity to provide comments to the GIPS Technical and Executive Committees before the guidance is formally adopted.

In addition to sharing your general feedback on the guidance, responding to the specific questions the GIPS Technical Committee has included within the exposure draft will greatly help shape the final version of the guidance statement before it is officially adopted. The entire exposure draft, which includes these questions, can be reviewed here.

To learn more about the Exposure Draft of the Guidance Statement on Broadly Distributed Pooled Funds or other GIPS and performance measurement topics, please contact us.