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.

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.