Author: Ashley Reeves, CIPM
Important GIPS Standards Updates and New Guidance
The Global Investment Performance Standards (GIPS®) continue to evolve, with several important GIPS Standards updates provided during the GIPS Standards Update session at the 28th Annual GIPS Standards Conference held on September 17-18, 2024, in San Diego, CA.
As of July 31, 2024, 1,785 organizations in 51 markets, claim compliance with the GIPS standards. Among these, 85 of the top 100 global firms, and 25 of the top 25, adhere to the GIPS standards for some or all of their assets. The top five markets are US, UK, Canada, Switzerland, and Japan, and 2024 a new market entrant in Brazil.
New Guidance – Guidance Statement on Firms Managing Only Broad Distribution Pooled Funds (BDPFs)
With the release of the Guidance Statement, firms that manage only BDPFs now have more flexibility in reporting. These firms are not required to provide GIPS Reports to prospective investors. The new guidance outlines how firms handle reporting to consultant databases or responding to requests for proposals (RFPs) without preparing GIPS Reports or GIPS Advertisements. The guidance also clarifies that generally the requirements for input data and return calculations apply, but composite construction and GIPS report distribution would not apply unless the firm chooses to prepare GIPS Reports. If the firm chooses to prepare GIPS Reports, then the firm would not follow this Guidance Statement, but would comply with all of the applicable requirements of the GIPS Standards for Firms. The Guidance Statement is effective for periods beginning on or after July 1, 2024.
This flexibility is a significant step for firms managing BDPFs, allowing them to balance compliance with operational efficiency. Firms choosing verification will also have a reduced scope if they do not prepare GIPS Reports or GIPS Advertisements, as key components normally verified, such as report distribution, may not exist in these cases.
Changes for Outsourced Chief Investment Officer (OCIO) Portfolios
OCIO portfolios, where a firm provides both strategic investment advice and investment management services, are also receiving focused guidance. Due to the unique nature of OCIOs, such as bespoke portfolio management, discretionary considerations, and legacy assets, the existing GIPS standards are not always a good fit for OCIOs. It was determined that OCIO-specific guidance was needed to address these considerations and improve consistency, transparency, and comparability in performance presentation and fees.
The draft Guidance Statement included some key concepts, such as a new required OCIO composite structure, based on the allocation of liability-hedging versus growth assets, or growth versus risk-mitigating assets. Additionally, both gross-of-fees and net-of-fees returns will need to be presented for these composites. This guidance was open for public comment and CFA Institute received over 30 comment letters. The guidance is expected to be finalized by December 2024.
Streamlined Benchmark Disclosure – Portfolio-Weighted Custom Benchmark Q&A
A portfolio-weighted custom benchmark is one that is created from the benchmarks of the individual portfolios that participate in the composite. Firms that use portfolio-weighted custom benchmarks, particularly in complex strategies like liability-driven investing (LDI) or multi-asset strategies, now have more options when disclosing benchmark components.
When using this type of benchmark, the following must be disclosed:
- That the benchmark is rebalanced using the weighted average returns of the benchmarks of all of the portfolios included in the composite
- The frequency of the rebalancing
- The components that constitute the portfolio-weighted custom benchmark, including the weights that each component represents, as of the most recent annual period end
- That the components that constitute the portfolio-weighted custom benchmark, including the weights that each component represents, are available for prior periods upon request
These custom benchmarks can lead to lengthy disclosures when there are a significant number of underlying components. While the Guidance Statement on Benchmarks for Firms provided some relief by not requiring disclosure for smaller benchmark components, new guidance was recently released in a Q&A to provide more relief.
Instead of listing every individual benchmark, firms can now determine how best to disclose the components given the strategy and can now provide aggregated component information based on criteria such as individual benchmarks, regions or asset classes, or other relevant criteria important to the management of the portfolios, e.g., duration groupings for LDI.
This adjustment addresses concerns about the increasing length of benchmark disclosures, which could overwhelm prospective clients. Firms are still required to offer detailed component data upon request, maintaining transparency while allowing for more concise reporting.
Upcoming Guidance and Resources
Several new tools and resources are in development to help firms navigate these updates. A Guide for Creating a GIPS Standards Policies and Procedures Manual for Firms Managing Only BDPFs was issued in July 2024. An SEC Marketing Rule Survey Report was issued in August 2024. Additional resources, such as whitepapers on attribution reporting and trade errors, will be issued for public comment soon. And CFA Institute appears to be considering additional guidance for calculating after-tax returns and addressing performance-based fees.
Upcoming guidance initiatives include:
- Draft GIPS Standards for Verifiers verification guidance specific to asset owners
- Draft GIPS Standards for Verifiers verification guidance specific to fiduciary managers
- Handbook for GIPS Standards for Verifiers
As the GIPS Standards expand their reach and adapt to industry needs, these changes are designed to help firms meet regulatory requirements while enhancing flexibility and transparency for asset owners, fiduciary managers, and OCIO portfolios.
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Thank you, Ashley, for this excellent summary! As a first-time attendee, I was truly impressed by the depth of knowledge on GIPS in the room, especially coming from South Africa. The speakers were exceptional, and I found their responses to questions both insightful and refreshing. It’s evident that GIPS isn’t always straightforward; often, it requires specialized knowledge to navigate the various options and determine the best course of action—followed by proper disclosure. I also appreciated the roundtable format, which fostered more engaging discussions than traditional presentations. It’s clear that GIPS is here to stay, and we need to work harder to promote it beyond the borders of America and Canada. South Africa will certainly benefit from individuals with strong GIPS expertise to drive this forward.