2020 edition has three chapters
- Firms
- Asset Owners
- Asset owners : pension funds, endowments, foundations, sovereign wealth funds
- manage investments, directly and/or through the use of external managers, on behalf of participants, beneficiaries, or the organization itself - Verifiers
Asset owners
> compete for business by marketing to prospective clients : GIPS Standards for
Firms
DO NOT compete for business : GIPS
Standards for Asset Owners
Mission
> promote ethics and integrity
instill trust
universal demand for compliance by asset owners
adoption by asset managers
support from regulators
=> benefit of the global investment community
Objectives
- promote investor interests and instill investor confidence
- Ensure accurate and consistent data
- Obtain worldwide acceptance of a single standard for the calculation and
presentation of performance - To encourage fair, global competition among investment firms
- Promote industry “self-regulation” on a global basis
Why Were The GIPS Standards Created?
- difficulty making meaningful comparisons on performance data
- Misleading practices hinder comparability
- Representative accounts
- Only reporting top-performing accounts
- Survivorship bias
- Presenting an ‘average’ performance
history (this ok) - Excluding poor-performing portfolios (this not ok)
- Presenting an ‘average’ performance
- Varying time periods
- Selecting time periods to favor results
- Practitioner-driven set of ethical principles:
- standardized, industry-wide approach for calculating and presenting historical
investment results - Help avoid misrepresentation of performance by investment firms
Who Can Claim Compliance?
- investment management firm that manages assets
- Compliance is voluntary and not typically required by legal or regulatory
authorities - Asset owners (as discussed previously)
- Consultants
- Cannot make a claim of compliance with GIPS Standards for Firms unless they manage assets but can claim to endorse the Standards
- Software vendors + their softwares
- Cannot be compliant
- Firm-wide process
- Cannot be achieved on a single product or composite
- Two options
- Comply or do not comply
Who benefits from compliance?
Benefits three main groups:
* Investment management firms
- Allows for global competition for compliant firms
* Prospective clients
- performance reports are accurate and allows them to more readily compare with other investment firms
* Asset owners and their oversight bodies
- Particularly where asset owners require their external managers to comply with GIPS
Composites
- Required
- Composite
- Aggregation of discretionary portfolios into a single group that represents a particular
investment objective or strategy - Must include all actual, fee-paying discretionary portfolios managed in accordance with the same investment objective or strategy
- A claim of compliance requires that all fee-paying discretionary accounts managed by
the firm be included in at least one composite - Firms cannot choose portfolios to include or exclude
- Establish criteria on an ex-ante basis (before the fact, not after)
Verification
- Firms are responsible for their claim of compliance and for maintenance of the
claim - Firms self-regulate
- Can voluntarily hire an independent third-party to verify claim
- Primary purpose
- Provide assurance that a firm has adhered to the Standards on a firm-wide basis
- Verification
- Entire firm; not on specific composites
- Has the firm complied with all the composite construction requirements of GIPS on a firm-wide basis?
- Are the firm’s processes and procedures designed to calculate and present performance results in compliance with the GIPS standards?
- Only performed by independent third-parties
Where local performance presentation regulations conflict with GIPS standards, GIPS-compliant firms should most likely comply with:
local regulations and disclose conflicts
The GIPS standards were created to prevent the:
selection of a top-performing portfolio to represent the firm’s strategy.
GIPS requirement
it is a requirement to include all discretionary, fee-paying portfolios in at least one composite.
it is a requirement to present a minimum of five years of annual investment performance compliant with GIPS standards or for the period since the firm inception if the firm has been in existence for less than five years.
firms must include terminated composites on this list for at least five years after the composite termination date.
firms must make every reasonable effort to provide a GIPS composite report to all prospective clients when they initially become prospective clients.
