Global Investment Performance Standards (GIPS) Standards

The Global Investment Performance Standards establish a standardized set of ethical practices that guide practitioners in analyzing and presenting historical data as a basis for the comparison of investment results.

Why GIPS were Created?

These GIPS standards provide a basis for including all relevant data, as well as avoiding misrepresentations. Prior to GIPS creation, like-for-like performance comparison was a challenge because of the presence of the following misleading practices:

• Representative Accounts: Firms use the top-performing portfolio as a representative of the firm’s overall investment results.
• Survivorship Bias: Firms exclude poor performing portfolios in presenting their performance and present an “average” performance history.
• Varying Time Periods: Firms “hand-pick” only the time periods during which the mandate outperformed the specified benchmark.

 The objectives of the GIPS standards:

1. Promote investor interests and instill investor confidence.
2. Ensure accurate and consistent data.
3. Obtain worldwide acceptance of a single standard for calculating and presenting performance.
4. Promote fair, global competition among investment firms.
5. Promote industry self-regulation on a global basis.

Source: CFA® Program Curriculum

Who can Claim Compliance?

Any investment firm can choose to comply with the Global Investment Performance Standards, and observance is voluntary. However, only management firms that manage assets can claim compliance.

Parties that cannot claim compliance are as follows:

• Plan sponsors.
• Consultants who do not manage assets.
• Software developers.
• Software vendors.

Additionally, to claim compliance, a firm must comply with all Global Investment Performance Standards.  Simple compliance with one or a limited portion of parameters is insufficient.

Who Benefits from Compliance?

Clients and prospective clients can have a degree of confidence in the numbers they are using to compare managers that the numbers are representative of the actual experience of those managers and not conveniently crafted records that distort what actually happened.

Investment management firms in compliance with GIPS requirements enjoy a greater level of credibility in the hands of investors. Compliance is seen as proof that the firm upholds a high level of ethical behavior. By adopting GIPS, firms in countries with few-to-no standards can compete with countries whose standards are more developed.

Benefits of compliance with GIPS Standards are as follow:

• GIPS primarily benefits investment firms and the clients of those firms. Compliance with GIPS ensures that a firm’s historical results are presented consistently and fairly.
• Conformity allows GIPS-compliant firms to bid against other GIPS-compliant firms throughout the world. Investors can easily compare the results of compliant firms, thereby adding credibility to GIPS-compliant performance data.
• Compliance with the GIPS standards strengthens the firm’s internal controls over performance-related processes and procedures.
• Compliance with the GIPS standards enhances the credibility of investment management firms.

Question 1

Which of the following parties can most likely claim compliance with GIPS?

1. Plan sponsors.
2. Firms that do manage assets.
3. Both plan sponsors and firms that do manage assets.

Solution

The correct answer is B.

Only investment firms that manage assets can claim compliance with GIPS.

Parties that cannot claim compliance are as follows:

• Plan sponsors.
• Consultants who do not manage assets.
• Software developers.
• Software vendors.

Question 2

Which of the following is least likely a key objective of GIPS?

1. Obtain global acceptance of a single standard for calculation and presentation of investment performance based upon fair representation and investor confidence.
2. Promote the use of accurate and consistent performance data.
3. Encourage fair, global competition among investment firms by creating barriers to entry.

Solution

The correct answer is C.

The correct statement would be “Encourage fair, global competition among investment firms without creating barriers to entry.”

A and B are incorrect. Those two statements are key objectives of GIPS.