Today, compliant firms provide “GIPS compliant presentations.” This is being changed to:

Managers of pooled funds, where the pooled fund’s strategy is not being offered beyond pooled fund investors, will not be required to create single-account composites. Instead, they can create a list of pooled funds. This is permitted provided the information they provide to prospective pooled fund investors (e.g., a prospectus) contains certain information.

If the pooled fund’s strategy is not offered to separate accounts, but the pooled fund would not be included in the composite, they again don’t have to create a single account composite for the pooled fund.

This change is expected to make compliance more attractive to and easier for many mutual fund managers who have heretofore not complied or have kept the funds out of their GIPS “firm definition.”

The EC proposes to broaden the use of money-weighting which today is limited to the internal rate of return. This would mean, for example, that the Modified Dietz formula could be used instead5.

5 This might be a bit confusing, since Modified Dietz is more typically used as an approximation for the true, time-weighted rate of return (TWRR). Modified Dietz is technically a money-weighted return: by geometrically linking monthly Modified Dietz returns, we end up with an approximate TWRR. If, for example, instead of calculating a since-inception IRR we do a since-inception Modified Dietz return, where we only value the portfolio at the start (inception) and end period, we have a money-weighted return.

It is proposed that if the manager controls the cash flows, and in addition meets one of the following criteria:

then they may use a money-weighted return. Once the firm decides the return that will be presented, it must be used consistently. Any change to the return type presented is required to be disclosed.

Valuation frequency will depend primarily on

The 2020 version expands the concept and types of independent valuation to private equity, infrastructure, and other real assets. And, there’s a new term “private market investments” to cover all these assets (including real estate).

The 2020 version expands the concept and types of independent valuation to private equity, infrastructure, and other real assets. And, there’s a new term “private market investments” to cover all these assets (including real estate).

It is proposed that private market investment must be valued at least once every 12 months by:

It’s proposed that this current required disclosure would only be necessary if the firm’s reporting net-of-fee returns based on actual fees. I.e., if the firm is showing only gross-of-fee returns or is showing net-of-fee based on model results, then they will no longer be required to have this disclosure.

This makes sense, right? Knowing the percentage of non-fee paying portfolios only has value if you’re seeing a net-of-fee return based on actual results, because for these non-fee paying portfolios actual is zero. 

Many firms like to wait until they’ve had their annual verification before including the results in their presentations. The problem is that sometimes this can drag out for quite sometime (a year or more).

The EC proposes that firms must update presentations within six months of year-end. For example, your 2020 returns will need to be included by 30 June 2021.

The AIMR-PPS® allowed firms to “carve out” parts of a portfolio and include it with other composites. For example, consider a balanced portfolio. Under the AIMR-PPS a firm could carve out the fixed income portion and put it into a fixed income composite; likewise, the equity piece could go into an equity composite. The only condition was that both carve-outs needed to include cash. Back then, firms could synthetically allocate the cash using a variety of methods.

This was a common practice in North America, but not elsewhere in the world. And so, with the introduction of GIPS standards, there was some “push back” to this idea, and the ability to carve out was restricted to cases where cash was managed separately with their own cash balances (e.g., through sub-portfolios). Because this isn’t often easy to do, most firms dropped carve-outs.

But now they’re coming back. But, with a restriction. The carve-outs must be in separate composites. For example, in what we’ve just described, previously the carve-outs would go into the same composite as accounts managed solely to those strategies, now, they must go into separate carve-out composites. In addition, when presenting the carve-out performance the firm must also provide the performance of the composite without carve-outs.

In addition, as with the AIMR-PPS, the parts that are carved out must be managed in the same fashion as accounts that are solely invested in these strategies.

Today, firms are not permitted to estimate transactions costs; rather, they must use actual. This can be a problem when these costs are “bundled” together (e.g., with bundled, wrap, and all-in-one fee portfolios). This constraint means that firms cannot report gross-of-fee returns, because they must be net of actual transaction costs.

The EC proposes to permit firms to use estimated transaction costs, provided these costs be equal to or higher than what the actual costs would have been.

The EC offers the following: “Currently, firms have a one-year grace period to bring any non-compliant assets into compliance. We clarified that assets of the acquired non-compliant firm or affiliation must meet all the requirements of the GIPS standards within one year of the acquisition date, on a prospective basis. We believe that the one year grace period should apply to performance at the new or acquiring firm, with no limit on when firms may port history from the prior firm or affiliation.” This means that firms will have the option of going back in time to bring the non-compliant entity into compliance.

A practice that seems to be coming more common is for private equity managers to obtain lines of credit to make initial investments, rather than to draw down cash from the committed capital the limited partners have agreed to provide. They will frequently use this committed capital as collateral, in order to obtain these loans. The benefit to them is that the resulting return is higher than it would otherwise be.

We’ve spoken with some of their clients, through the Asset Owner Round Table, and there seems to be a lot of frustration with this practice, as they feel the returns are overstated.

The GIPS EC is proposing to deal with this by requiring managers to report performance both with and without the effect of these lines of credit.

The EC proposes to allow firms to report annualized composite returns for the total period for all periods presented in the composite report, through the most recent period end or most recent annual period end. This is an expansion of the ways firms can advertise performance.

The EC also proposes to reduce the number of currently required disclosures. The following will now be recommended: