The Global Investment Performance Standards (GIPS standards) are a set of industry self-regulated rules as to how to calculate and present past investment performance to prospective clients [for firms who comply], or boards and other stakeholders [for asset owners who comply].

They are considered “ethical principles,” that require “full disclosure” of relevant information. They are considered “best practice,” and have been endorsed by dozens of countries throughout the world.

They truly are “global,” not just in name but in reality. They are accepted worldwide assuring a firm’s and asset owner’s investment performance is complete and fairly presented.

They do not address reporting to clients; rather, for firms they speak to the disclosures and numerical information should be given to prospects in terms of the firm’s past performance.

We believe the GIPS standards are best viewed as an investment, for both firms and asset owners, rather than as an expense.

Once a firm or asset owner claims compliance with the GIPS standards, GIPS verification is optional, though highly recommended.

It involves the use of an independent third party, such as TSG, to review the firm’s policies & procedures related to composite and pooled fund maintenance, along with the calculation, presentation, and distribution of performance; as well as their GIPS reports, to test that the firm is compliant with the GIPS standards. It is a highly specialized and procedural review that requires a GIPS verification firm that is experienced with the Standards, as well as in performance measurement and reporting. We believe that GIPS verification is “best practice,” since most firms and asset owners claiming GIPS compliance would likely be out-of-compliance if it wasn’t for verifications.

This is because the rules are relatively complex and, at times, can be very confusing for firms and asset owners claiming GIPS compliance.

Under the GIPS standards, performance examinations are akin to an audit, where the independent verifier reviews a specific composite’s or pooled fund’s returns and other data to ensure its accuracy. This can involve cross-checking data between the firm’s or asset owner’s internal portfolio accounting and/or performance system(s) with custodial records. The purpose of it is to affirm that the information shown on the corresponding GIPS report is accurate and are presented in compliance with the GIPS standards.

We generally discourage asset managers [firms] from having them done, as we believe that in many cases they are an unnecessary expense.

As for asset owners, many find great value in them, so in these cases they can be thought of as an investment.

When the GIPS standards were originally introduced, the “Big-8” now “Big-4,” or if you prefer, “Final 4,” accounting firms standard operating practice was to perform verifications and additional performance examinations. As a legacy process they simply continued to perform unnecessary performance examinations. Many firms out of habit, having examinations done, never realizing they were, in reality, not needed.

 Is there a marketing benefit to having them done? In general, we believe they do not, and, again, usually discourage them for firms however we encourage them for asset owners. We do have asset manager clients who have them done, as they feel there are marketing benefits.

This is a bit complicated to answer, as we don’t know who you are or who you serve, but will attempt to provide an answer.

If your firm serves the institutional market (e.g., pension funds, endowments, foundations, sovereign wealth funds), the answer is “yes,” as this market is more and more demanding, or at least favoring, compliance. In some cases, you will not be considered by a prospect unless you comply. GIPS compliance provides the prospect with greater confidence in the information you give them. Request for Proposals (RFPs) and Request for Information (RFIs) from institutions markets typically ask if you are GIPS compliant and if not, why not.

If your firm primarily serves the retail market, there likely be no expectation that you comply. That said, we believe that the Standards remain “best practice,” regardless of the market, and that your firm can set itself apart from others by moving to compliance.

If your firm mainly invests in mutual funds, compliance has become quite a bit easier with the new 2020 version of the Standards. In the past, you would have been required to create GIPS composite reports for all of your funds; however, with the new rules, this is not needed where the funds are in strategies you will not market to separate accounts.

If your firm is a hedge fund, private equity manager, or real estate manager, we believe compliance would be a great way for you to demonstrate your commitment to best practices.

An added benefit is that the firm’s investment performance policies and procedures are likely to become more robust, resulting in increased operational efficiency and enhanced internal controls.

As with many things in life, we often seek “best practice” in order to determine how we should proceed. The Standards are globally seen as best practice.

In the public pension fund market, we have seen an increase in interest over the past few years, and regularly hear from such institutions who have decided to move to compliance.

TSG serves the needs of multiple sovereign wealth funds and non-government organizations (NGOs) that have moved to compliance.

Asset owners, like asset managers, want to have confidence in how they both calculate and report their past performance. The GIPS standards are seen as the ideal way to do this. GIPS compliance will provide greater confidence for both those who create the reports as well as those who receive them.

As with firms, an asset owner’s investment performance policies and procedures are likely to become more robust, resulting in increased operational efficiency and enhanced internal controls.

Asset owners claiming compliance with the GIPS standards shows their legislative bodies, oversight bodies, and the general public that they have

a commitment to industry best practices and meeting a higher ethical standard. An added benefit for the asset owner’s investment performance policies and procedures are likely to become more robust, resulting in increased operational efficiency and enhanced internal controls.

The GIPS standards are complex, and GIPS compliance can be challenging. Firms and asset owners should hire a GIPS verification firm or GIPS consulting firm that has a solid understanding of the GIPS standards and how to apply them. We recommend that firms and asset owners ask potential GIPS verification firms the following questions:

What experience does the firm have?
What experience do the people who will conduct your GIPS verification have?
What do their clients say?
How active are they in the industry?
 
Our opinion is based on decades of experience and the results of client surveys.

A fundamental aspect of the Standards is the concept of a composite. It allows firms to group accounts that are managed according to a similar investment mandate or strategy. Composites are far superior to using a representative portfolio (which might be “cherry-picked”), a model, or a subset of accounts.

Firms typically create composites in line with the strategies they offer.

Composite construction as well as decisions about them can be a bit complicated. TSG covers this topic in great detail during our GIPS Planning Sessions.

Actually, no. GIPS compliance is at the “firm level.” And firms must be able to provide GIPS reports for all strategies in a timely manner.

Asset owners are entities that manage investments on behalf of participants, beneficiaries, or the organization itself, and include, but are not limited to, pension funds, endowments, foundations, family offices, provident funds, insurers and reinsurers, sovereign wealth funds, and fiduciaries

A firm must be defined as an investment firm, subsidiary, or division held out to the public as a distinct business entity. Only firms that manage real assets can claim GIPS compliance.