What are the GIPS Standards?
Sean P. Gilligan, CFA, CPA, CIPM
September 15, 2016
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.
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 firstname.lastname@example.org.