The GIPS Standards

Features of GIPS, and Compliance

The investment industry is increasingly global in nature.  For both firms and clients, there is a benefit to adopting a standardized protocol for calculating and presenting performance data.  By adopting GIPS, firms in countries with few-to-no standards can compete with countries whose standards are more developed. In addition, both current and prospective clients can have greater confidence in GIPS-compliant firms and their information.

The first Global Investment Performance Standards were published in 1999, after consideration by a committee sponsored by the CFA Institute. The initial standards were meant to establish global provisions that would permit the adoption of performance standards in developing markets; give the global investment industry a universally accepted approach for calculating and presenting performance; and addressing liquid asset classes, such as equity, fixed income, and cash.

Later in 1999, the CFA-sponsored committee was replaced by the Investment Performance Council (IPC).  IPC was charged with further developing GIPS.  Representatives from more than 15 countries contributed to the development of GIPS. By 2005, more than 25 countries had adopted GIPS, resulting in a single, global standard of calculation and presentation of performance standards.

To maintain relevance, the GIPS standards are continually reviewed and updated. Beyond 2005, updates have occurred in 2008 and 2010.  Objectives of the GIPS Executive committee are as follows:

1. Establish best practices within the investment industry for calculating and presenting performance, such that investor interests are promoted, and investor confidence is increased.
2. Obtain global acceptance of a single standard for calculation and presentation of investment performance based upon fair representation and investor confidence.
3. Promote the use of accurate and consistent performance data.
4. Encourage fair, global competition among investment firms without creating barriers to entry.
5. Foster self-regulation within the worldwide industry.

The following is an overview of key GIPS standards:

1. GIPS are ethical standards for an investment performance presentation to ensure fair representation and full disclosure of investment performance. In order to claim compliance, firms must adhere to the requirements included in the GIPS standards.
2. Meeting the objectives of fair representation and full disclosure is likely to require more than simply adhering to the minimum requirements of the GIPS standards. Firms should also adhere to the recommendations to achieve best practices in the calculation and presentation of performance.
3. The GIPS standards require firms to include all actual, discretionary, fee-paying portfolios in at least one composite defined by investment mandate, objective, or strategy to prevent firms from cherry-picking their best performance.
4. GIPS relies on the integrity of input data. The accuracy of input data is critical to the accuracy of the performance presentation.  The underlying valuations of portfolio holdings drive the portfolio’s performance.  These and other inputs need to be accurate.  GIPS standards require firms to adhere to certain calculation methodologies and make specific disclosures and the firm’s performance.
5. Firms must comply with all requirements of the GIPS standards, including any updates, guidance statements, interpretations, questions & answers (Q&As), and clarifications published by CFA Institute and the GIPS Executive Committee, which are available on the GIPS website (gipsstandards.org) as well as in the GIPS Handbook.

In creating a historical performance record, a firm must present at least five years of GIPS-compliant annual investment information.  If a firm is less than five years old, then the firm must present data since its inception or since the composite inception. In subsequent years, a firm must add a year’s worth of additional composite data each year, building up to 10 years of GIPS-compliant information.

Firms may include non-GIPS-compliant information for periods before January 1, 2000 (before the existence of GIPS), in addition to GIPS compliant information. However, all non-compliant information included in a composite must be identified as such.

In cases of private equity, real estate, and/or wrap fee/SMA portfolios, firms must comply with Sections 6, 7, and 8, respectively, of the GIPS standards effective as of January 1, 2006.

Firms must make every effort to comply with GIPS standards.  Additionally, periodic internal audits are highly recommended. Thorough audits of all processes will instill confidence in investors who rely on GIPS for faith in firm performance.

As noted, GIPS compliance is voluntary and self-regulated.  Due to the nature of this setup, a strong commitment to ethical integrity is required to maintain GIPS compliance.  The GIPS Executive Committee encourages firms to recognize the benefit of self-regulation and consider taking action against firms that falsely claim compliance with GIPS.

Scope of GIPS

A local sponsoring organization must be present in each country that adopts GIPS standards. This sponsor acts as a liaison between the GIPS Executive Committee and the local investment market. The role of the sponsor is to support the work of the GIPS Executive Committee with the host country and represent the interests of that local market as standards are developed or revised.

The GIPS Executive Committee encourages countries without performance standards to adopt GIPS as the local standards and translate them into local languages as needed. Related to the translation of GIPS standards, if a discrepancy in translation arises, then one should default to the English version of GIPS.

Use of GIPS with other Standards

In cases where local laws and standards already require certain aspects of calculation and presentation of historical performance, firms are encouraged to comply with GIPS in addition to local regulations. However, compliance with local laws and standards does not necessarily lead to GIPS compliance.

In situations where local laws and standards conflict with GIPS, firms must comply with regulations and make full disclosure of those conflicts within performance presentations.

Nine Sections of GIPS

The 2010 edition of the Global Investment Performance Standards (GIPS) is divided into nine sections. Each section includes provisions and sub-categories.  The nine sections are as follows:

0. Fundamentals of Compliance

1. Input Data

2. Calculation Methodology

3. Composite Construction

4. Disclosure

5. Presentation and Reporting

6. Real Estate

7. Private Equity

8. Wrap Fee/Separate Managed Account (SMA) Portfolios

Question

Which of the following are key objectives 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 use of accurate and consistent performance data
3. Encourage fair, global competition among investment firms without creating barriers to entry
4. Foster self-regulation within the worldwide industry

A. I and/or II

B. III and/or IV

C. All of the above

Solution

The correct answer is C.

All of the objective listed are key to GIPS.