Steps to GIPS compliance, if you’re not quite ready to comply

We were recently asked the following:

“Do you have any recommendations or best practices we should be employing now to provide an easier transition to GIPS® reporting in the future?”

I guess we’d call these “preliminary steps to GIPS compliance.” I.e., to help “lay the groundwork” for eventual compliance. Great question!

I’ll share with you what I shared with the sender:

1. Identify the strategy(ies) that each account is in (as well as has been, over the past five years or so, in case there were changes)
2. Look over the prior five years or so, and identify accounts that have since terminated. What strategy(ies) were they in?
3. Ensure the portfolio return calculation meets the GIPS requirements.
4. Begin to create composites. Establish policies as to timing to (a) add new accounts, (b) remove terminated accounts, and (c) handle situations where an account changes a strategy (therefore, removing from one and adding to another)
5. Think about rules that would cause an account to be considered not representative of the strategy. For example, if a client imposes restrictions such that the account wouldn’t represent the strategy. Document these rules.
6. Think about error correction. What level of errors would they consider to be “material.” Material could be interpreted as a level of error that might cause the prospect to draw a different impression of the presentation.
7. Create composites for all strategies. Calculate composite returns using an asset-weighted approach. If they have software that can support composites, great; if not, they can either use Excel or purchase such software. These composites should include currently active accounts as well as accounts that had been managed in the strategy but have since terminated.

My colleague, John D. Simpson, CIPM, added the following:

I’d add that they should start to identify an appropriate benchmark for each strategy/composite, and/or determine if the benchmarks they have been using are appropriate. This includes thinking about how the benchmark strategy might differ from their strategy in significant ways that may be important to disclose (e.g., exclusion of sectors or countries; use of derivatives or leverage).

Also they might want to glance at the sample composite presentations in the GIPS standards, to get a sense of what they will need to show. They might want to try to see what their competitors show on their composite presentations as well, if possible.

I think this is a good start; there’s a lot more they could do, but I think these are some important steps.

How about a GIPS Planning Session, as part of your steps to GIPS Compliance?

We recommend to our new GIPS verification clients that we begin with a “GIPS Planning Session,” aka “GPS Session.” This is TSG’s proprietary approach to providing clients with a “grounding” in the Standards, and ultimately a “road map” to compliance.

To learn more, please contact Chris Spaulding (CSpaulding@tsgperformance.com), Steve Sobhi (SSobhi@tsgperformance.com), or Patrick Fowler (PFowler@tsgperformance.com). You can also call us at 732-873-5700.