Understanding the Global Investment Performance Standards (GIPS ) A Guide for Plan Sponsors & Investment Consultants

Transcription

1 Understanding the Global Investment Performance Standards (GIPS ) A Guide for Plan Sponsors & Investment Consultants

2 The GIPS standards were created and sponsored by CFA Institute through the collaboration of the global investment community. They are broadly accepted, voluntary global ethical standards for calculating and presenting investment performance for a firm to market their investment management services globally. The standards promote fair representation and full disclosure of investment performance. The GIPS standards allow investors and others to compare the performance of investment organizations in a consistent, prescribed format for organizations around the world. Firms claiming compliance adhere to a set of comprehensive standards that covers input data, calculation methodology, composite construction, disclosures, and presentation and reporting. The standards are maintained by the CFA Institute GIPS Executive Committee, a global nine-member governing body comprising senior industry professionals representing various regional, technical, and other stakeholder groups. The standards are reviewed and updated periodically through guidance statements, interpretations, questions and answers, clarifications, and revisions. Visit the GIPS website ( for more information and to sign up for the GIPS electronic newsletter.

3 RELEVANCE OF THE GIPS STANDARDS FOR PLAN SPONSORS AND INVESTMENT CONSULTANTS Plan sponsors and investment consultants typically inquire, either formally or otherwise, about a prospective investment management firm s status regarding compliance with the GIPS standards.* Learning more about the key aspects of the GIPS standards will prove valuable both to an investor seeking to engage the services of an investment management firm and to members of a firm who are interested in complying with the GIPS standards. Compliance with the GIPS standards has become a de facto requirement in the business of winning new mandates not only for many investment management firms especially those that serve the institutional marketplace but also for firms operating in the retail space. * Please note that for the purposes of this document, the term plan sponsor, although used in many countries to refer to retirement plans, is meant to encompass all asset managers who typically do not have prospective clients, including pension plans, insurance plans, endowments, foundations, and family offices.

4 BENEFITS OF THE GIPS STANDARDS For plan sponsors, benefits include: Improved transparency ensures that investment performance data has been presented on a consistent, reliable, comparable, and fair basis. A starting point for researching and evaluating investment management firms, with the required and recommended disclosures facilitating additional dialogue with the investment management firm and providing additional insights into the returns presented. A level playing field, allowing firms of different sizes and from different geographical regions to present their investment performace on a comparable basis. Evidence that a firm has made a voluntary commitment to go above and beyond the legal and regulatory requirements to provide data that adhere to globally accepted ethical standards. Assurance that an investment management firm has established strong internal controls and processes in order to claim and maintain its compliance with the GIPS standards. Relative assurance that the same principles for calculating and presenting performance are being implemented across firms and strategies.

5 We see increasing numbers of firms keen to claim compliance with the GIPS standards in particular, because it satisfies the transparency and consistency demanded by institutional clients in the RFP. Gianluca Oderda, CFA Head of Multi Assets and Total Return Team Pictet Asset Mgmt SA Geneva, Switzerland

6 COMPLIANCE: FREQUENTLY ASKED QUESTIONS WHO CAN CLAIM COMPLIANCE WITH THE GIPS STANDARDS? The GIPS standards apply to a firm that is defined as an investment firm, subsidiary, or division held out to clients as a distinct business entity. Once a firm is properly defined, the definition is used as the basis for applying the GIPS standards. The Standards must be applied on a firm-wide basis to all discretionary assets managed by the firm and not on a product- or compositespecific basis. Only organizations with actual discretionary assets under management can claim compliance with the GIPS standards. This includes plan sponsors. Firms that delegate the discretionary investment management function to a sub-adviser must include those assets in the firm definition for the purposes of complying with the GIPS standards as long as the firm retains investment authority over the selection of the sub-adviser.

7 WHO CANNOT CLAIM COMPLIANCE WITH THE GIPS STANDARDS? WHEN DOES A FIRM MAKE THE CLAIM OF COMPLIANCE? WHAT IS THE RELATIONSHIP TO REGULATORY REQUIREMENTS? A software company may not claim compliance. The company may state that their product assists with the compliance process, but no software company may itself claim compliance. Likewise, the use of a particular software vendor or product by an investment management firm does not ensure compliance with the GIPS standards. Third-party custodians and performance measurers (or other outsourced providers) may not claim compliance, but may facilitate an investment management firm s claim of compliance. Compliance can be attained only on a firm-wide basis. Investment products, composites, strategies, funds, portfolios, return calculations, methodologies, formulas, or policies and procedures cannot individually be in compliance with the GIPS standards. A firm may make the claim of compliance after all the required elements of the GIPS standards are met. The firm cannot state that it is in compliance with the GIPS standards except for... or make any other statements that may indicate partial compliance with the GIPS standards. Compliance with applicable laws and/or regulation with regard to performance calculation and presentation does not necessarily ensure compliance with the GIPS standards; nor does compliance with the GIPS standards assure compliance with local regulatory requirements. Firms must follow applicable local laws and/or regulation, and must disclose if any laws or regulations conflict with the GIPS standards, including the manner in which the compliant presentation is in conflict.

8 Knowing a firm is GIPS compliant and verified helps give us confidence in their performance numbers and their adherence to best practice in their processes. Trevor Persaud Practice Leader, Russell Investments Singapore

9 VERIFICATION AND PERFORMANCE EXAMINATION OVERVIEW WHAT IS VERIFICATION? Verification, performed by an independent third-party verifier, assesses whether the firm has complied with all the composite construction requirements on a firm-wide basis and whether the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Though voluntary, verification is strongly recommended. HOW DOES VERIFICATION HELP? Verification does not certify or guarantee that the firm complies with the GIPS standards. However, verification brings additional credibility to the firm s claim of compliance and supports the overall guiding principles of fair representation and full disclosure of a firm s investment performance. Verification does not confirm the accuracy of any specific composite presentation.

10 WHAT IS A PERFORMANCE EXAMINATION? In addition to verification, a firm may choose to have a specifically focused performance examination of a particular composite compliant presentation by an independent third-party verifier. A performance examination may be performed concurrently with or subsequent to a verification. A performance examination report is issued with respect to composite(s) examined by the verifier and does not opine on any other composite(s) not subject to a performance examination. Additional information on the verification and performance examination process can be found on the GIPS standards website. The GIPS standards have given my fund extra assurance that performance is being calculated using industry best practices. Lynn Hoover, CPA Director, Investment Performance, STRS Ohio Columbus, Ohio, USA

11 Compliance with the GIPS standards is always to be encouraged. It produces reliable and comparable performance information and indicates those firms with rigorous internal controls. Brian Henderson Principal, Mercer Edinburgh, Scotland CLAIM OF COMPLIANCE AND VERIFICATION STATUS The 2010 edition of the GIPS standards became effective on 1 January All presentations that include performance results for periods after 31 December 2010 must meet all the requirements of this edition of the GIPS standards. Once a firm has met all the requirements of the GIPS standards, they must use one of the required compliance statements in a compliant presentation. The claim of compliance must only be used in a compliant presentation.

12 ASSESSING AN INVESTMENT MANAGEMENT FIRM These questions can help you assess the validity of an investment management firm s claim of compliance. They can be asked of current or prospective investment management firms who claim compliance with the GIPS standards. When did the firm begin to claim compliance with the GIPS standards? Does the firm have readily available compliant presentations for all composites? Does the firm have up-to-date written policies and procedures for maintaining compliance with the GIPS standards? Are the firm s policies for valuing portfolios, calculating performance, and preparing compliant presentations available? Can the firm provide a list of the firm s composite descriptions? Are any of the firm s investment products excluded from the firm definition under the GIPS standards? If so, why? What is the valuation basis for performance calculations (e.g., valuation for private equity, real estate, and illiquid assets)? Who is the contact person at the firm for compliance with the GIPS standards? How does the firm ensure ongoing compliance with the GIPS standards? Has the firm s claim of compliance been verified? If so, who is the verification firm and for what time period was the firm verified? What is the experience of the verifier(s)? Can the verifier(s) provide client references? Have any composites been subject to a specific performance examination?

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