Performance Perspectives Blog

Simplify GIPS Compliance

by | Apr 12, 2018

Looking for ways to simplify GIPS compliance

Let’s face it: complying with the Global Investment Performance Standards (GIPS®) can be a challenge. And so, why not look for ways to simplify the process?

Here are a few ideas you may find of interest.

Get off of spreadsheets

GIPS compliance requires technology. But too many firms still use spreadsheets to house their composites. These require a great deal of oversight, data entry, manual intervention, that can too easily lead to errors. The only “intelligence” that is built in is that it can do a good job of doing the calculations. But they’re quite risky, in general.

Saying that, many of our GIPS verification clients use them quite effectively. However, they still must devote a lot of time to them, especially if they need to:

  • check for minimums
    • accounts rising above, or
    • falling below
  • monitoring cash flows
    • if they have a significant cash flow policy
    • and, if they’re using a monthly method, and must catch those occasions when large cash flows occur, so they can override the return
  • monitoring the timing of accounts going in and out

We recently conducted a software survey: actually, two, one with users and one vendors. The vendor survey resulted in our famous “wall charts,” which provide a great deal of detail on what the various vendors offer. If you’re a subscriber to The Journal of Performance Measurement®, then you most likely already got your copy. If you’re not a subscriber and wish to obtain one, we have limited copies. If you’re a verification client, we’ll be glad to gift you one, while supplies last. However, if you’re neither a subscriber nor a verification client, in all likelihood we will have to put you on a “waiting list,” to make sure our clients get there’s, and then will charge you a fee. Please send an email to to learn more.

Okay, so back to the subject at hand: ways to simplify GIPS compliance.

Rethink your “GIPS discretionary” rules

You’re probably aware that I’m not a fan of the use of the term “discretionary” when it comes to the Standards: to me, “representative” is a lot more meaningful, and avoids the typical confusion with the legal definition of the word. But putting that aside …

Perhaps you have rules such as “if the client restricts us from buying two or more securities on our “buy list,” they’re deemed nondiscretionary. To me, there is nothing wrong with this. However …

What if you raised it to “three or more,” what might the impact be?

If your composite has a lot of accounts, will the slight or even moderate variance even be noticed? 

I’d run a few tests, and see what, if any, impact including these accounts in the composite may have. If it’s de minimis, then I’d change the rule. And, perhaps consider upping the level further (four or more?). Anyway, you get my point.

Simplify by stopping the significant cash flow policy

I consider myself one of the significant cash flow (SCF) policy’s fathers (the other being Neil Riddles, CFA, CIPM). We were on the AIMR-PPS® implementation committee many years ago, and strongly encouraged the adoption of this option.

That said, today I am not so sure that it’s worth employing.

Consider this:

  • if the composite has a very few accounts (e.g., less than five), having the rule could result in a gap in performance (if more than one account had a SCF in the same month)
  • if the composite has a lot of accounts, keeping the account in probably won’t make a difference.

Translation: the rule probably makes sense when you have, let’s say, 5-20 accounts or so. I’d have to do some research to really arrive at a better estimate, but given the variables, it’s probably not worth it.

The reason firms typically employ this rule is so they can remove accounts that have, well, significant cash flows that result in more cash than the manager would normally have. This is why Neil and I thought it was a good idea. Of course, there’s also the issue of the account experiencing some disruption of cash needs to be raised, as well as the presence of any of that cash while the manager is waiting for the client to take the money.

But, what would happen if you dropped the rule? Would you notice anything?

And perhaps, if you did for one month, notice a slight impact, when you geometrically link these months together, will it all just smooth out?

If you have a robust, functionally rich composite system that takes care of the SCF implementation for you, then to continue with it doesn’t really matter (at least from an oversight perspective). But even in these cases, you may want to consider dropping the rule.

If you’re using a spreadsheet, or perhaps a composite system that comes with very little in the way of “intelligence,” that requires you to go in and temporarily remove accounts yourself, well, then, to drop the rule would probably save you some time, right?

Why offer more than you need to?

GIPS compliance includes the need to disclose a great deal of information. Add to that the requirements of regulators, and you have a fairly sizable composite presentation. And so, why include disclosures that are not needed?

For example, you’re required to state a composite’s minimum, if one exists. If it doesn’t have a minimum, you’re not required to state “The composite has no minimum.”

Some firms provide details on the timing of adding new accounts to the composite, as well as how they calculate their returns. This isn’t necessary.

Simplify; simplify!

Just some thoughts! Perhaps you have other ideas as to how one can simplify their GIPS compliance.

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