This post, on the proposed changes to the GIPS Asset Owner Guidance Statement, was done by a guest blogger: John D. Simpson, CIPM.

 

Last month, the GIPS® Technical Committee issued a proposed revised Guidance Statement on the Application of the GIPS Standards to Asset Owners for public comment.  This post covers the highlights of this revised document in this blog post.

Background

The GIPS Executive Committee previously issued a guidance statement on applying the GIPS standards to asset owners.  The public comment period was March 4, 2013 to August 1, 2013.  A revised version of this document was adopted on June 6, 2014, and went into effect on January 1, 2015.  Retroactive application of this guidance was not required.

The current version of the asset owner guidance is available at here.

Why New Guidance?

The Executive Summary for the proposed revised guidance statement indicates:

“the purpose of revising … is to address certain questions that have arisen with respect to the original Guidance Statement.  On closer inspection, the GIPS Technical Committee decided that some of the language should be revised.”

While the new document has some revisions that fall under this description, it is important to recognize that the new document also proposes some significant changes.  The proposed new guidance includes the following major points:

• Proposes lowering the initial track record requirement to one-year to claim compliance
• Clarifies (revised?) valuation requirements on real estate and private equity in total fund
• Poses question on applicability of guidance to asset owners that manage assets of other asset owners
• Proposes requirements regarding transition from old to new guidance, and presenting non-compliant periods
• Proposes additional sample compliant presentation.

First, the Minor Revisions to the GIPS Asset Owner Guidance Statement

The minor revisions and clarifications to the GIPS Asset Owner Guidance Statement, other than what is mentioned elsewhere in this blog post (see real estate and private equity changes), are all pretty straightforward stuff. This includes:

• The occasional reference to “plan sponsor” has been changed to “asset owner”
• Some references to “fund” have been changed to “total fund”
• Editing has been done in some examples to use the terms “police officers” and “firefighters” rather than “policemen” and “firemen,” respectively
• Other pretty minor stuff, in my opinion.

One-Year Track Record

Currently, when firms initially establish compliance with GIPS, they must present at least a five-year track record (or less, if the firm and/or composite has existed for less than five years). Compliant firms then add a year annually until a ten-year track record is shown.  From that point, at least a ten-year track record must be presented, though firms are recommended to show more.

The Technical Committee proposes to reduce the initial time period requirement from five years to one year.  This lower requirement is meant to facilitate more asset owners claiming compliance with GIPS.  The lower requirement would not apply to asset owners that compete for business and have prospective clients.

Clarified/Revised Valuation Requirements for RE and PE

The proposed guidance indicates that asset owners would be required to determine the fair value of real estate and private equity on at least a monthly basis and on the date of large cash flows.  This would essentially make the valuation frequency for these asset classes on a par with the requirements for liquid asset classes.

By contrast, the existing guidance indicates that GIPS provisions 6.A.1 through 6.A.5 apply to real estate. Provisions 7.A.1 through 7.A.2 apply to private equity investments in the total fund.  Notably, GIPS provision 6.A.2 requires quarterly valuations for real estate assets (large cash flows do not apply) and 7.A.2 requires annual valuations for private equity assets.

The revised guidance, then, significantly “ups the ante” with respect to valuations of these asset classes.  There is indication that firms can use prior valuations adjusted for market/economic conditions. But even with that considered, the change in the requirement is pretty significant, in my opinion, at least operationally.

Question on Applicability to Asset Owners Managing Assets of Other Asset Owners

The existing guidance indicates that it is applicable to asset owners that manage the assets of other related asset owners (e.g., a state pension fund managing the assets of a municipality).

The proposed guidance revisits this subject, asking whether the guidance should be applied in this situation.  Presumably, some of the feedback and/or questions on the existing guidance questioned the validity of this.

Requirements on Transition from Old to New Guidance; Non-compliant Periods

Given the effective date of the current guidance and the proposed dates in the new guidance, an asset owner’s track record that is presented in a GIPS compliant presentation can be broken into three time periods:

• Performance periods prior to January 1, 2015: if an asset owner claimed compliance with GIPS, it can consider that time period to still be compliant. The asset owner would need to disclose how the returns do not follow the proposed new guidance.
• Performance periods between January 1, 2015 and January 1, 2018: (presumably) the asset owner must follow the existing guidance, though early adoption of the new guidance (once adopted) would be allowed. Disclosure might be necessary to help readers interpret the performance shown.
• Performance periods after January 1, 2018: the proposed guidance indicates that firms must follow “both versions” of the guidance. This presumably means the existing guidance and the version of the proposed guidance that is eventually adopted.

Comment Period: Now Open; Closes October 29, 2016!

The comment period for the proposed guidance is now open, and will close on October 29, 2016.  We encourage you to comment. Please also answer the specific questions posed by the GIPS Technical Committee, and comment on what you agree with and also what you disagree with.  CFA Institute indicates:

Responses will be accepted by email, hard copy, and fax. Please submit your comments as early as possible to facilitate the review process. Unless you request otherwise, all comments and replies will be made public on the GIPS standards website. Comments may be submitted as follows:

E-mail:  standards@cfainstitute.org

Fax: +1 (434) 951-5687

Post:

CFA Institute, Global Investment Performance Standards 

Re: Guidance Statement on the Application of the GIPS Standards to Asset Owners

915 E. High Street, Charlottesville, VA 22902  USA

As always, TSG will be happy to help firms with questions related to GIPS and asset owners, so please feel free to reach out to Chris Spaulding (cspaulding@tsgperformance.com) or Patrick Fowler (pfowler@tsgperformance.com) with any questions you may have.