Introduction to Global Investment Performance Standards (GIPS)

GIPS Structure, Compliance with and Benefits from GIPS

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. These standards provide a basis for including all relevant data, as well as avoid misrepresentations.

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:

1. Plan sponsors
2. Consultants who do not manage assets
3. Software developers
4. 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.

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.

Furthermore, 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.

GIPS Composites

A primary aspect of GIPS is to require composites, which are aggregate portfolios managed with a similar investment approach. Therefore, if a firm presents its record for a particular equity classification, all portfolios meeting pre-established criteria for that class must be represented. A firm cannot include some and exclude others at will. In addition, composite guidelines prevent firms from using only their best-performing portfolios, thereby skewing presentation results.

GIPS Verification

Firms are responsible for their claims of compliance, as well as upholding that compliance.  It is incumbent upon firms that claim GIPS compliance to conduct internal audits to ensure that GIPS is being upheld in all instances. They may hire a third party to verify the proper use of GIPS.

Verification must include an entire firm’s practices, not just a small grouping of composites. Authentication should include information related to the proper formulation of composite information and company policies established to calculate and present GIPS-compliant performance. Verification does not validate specific results of historical data.

Question

Which of the following parties can claim compliance with GIPS?

I. Plan sponsors

II. Firms that do manage assets

A. Only I

B. Only II

C. Both I and II

Solution

The correct answer is B.

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