Global Investment Performance Standards (GIPS)

What are the Global Investment Performance Standards (GIPS)?

Global Investment Performance Standards (GIPS) are ethical principles set by the CFA Institute for investment companies, precisely: firms, asset owners, and verifiers. Applying these principles is voluntary. Present standards have been in effect since January 1, 2020.

The CFA Institute is a global nonprofit institute that provides education and certification to investment management professionals. A CFA (Chartered Financial Analyst) is a credential the said institute provides.

It is the worldwide recognized standard for calculating and presenting investment performance. As a result, GIPS compliance has become a way for firms to market investment management services globally.

The first version of GIPS was published in April 1999. Its development involved individuals and organizations from over 15 countries. As of June 2019, the CFA Institute has partnered with organizations in over 40 countries that contribute and help promote and develop GIPS.

The mission of GIPS is to promote ethics and integrity by instilling trust through the use of these standards, thus achieving universal demand for compliance by asset owners, adoption by asset managers, and support from regulators, to benefit the global investment community.

GIPS Standards for Firms

The GIPS Standards being complied to depend on the type of entity applying for them. While they share some similarities, there are different standards to be followed depending on whether you’re an investment firm, asset holder, or verifier. These are the ones for firms.

1. Fundamentals of compliance

To assure compliance, firms must define themselves clearly, provide GIPS reports to all prospective clients, comply with applicable laws and regulations, and ensure that presented information is accurate.

The firm must also establish criteria for judging portfolios, implementing investment strategies, and defining the boundaries for determining total assets.

2. Input data and calculation methodology

To facilitate comparability, input data, and calculation methodology must be consistent, as outlined in GIPS-mandated calculation methodologies.

3. Composite and pooled fund maintenance

To maintain composite and pooled funds, meaningful composites must be created.

These are crucial to the fair presentation, consistency, and comparability of performance over time (and among firms).

4. Reporting

These four sections, each with its requirements and recommendations, depending on whether a composite or pooled fund report is being prepared. They also depend on whether time-weighted returns or money-weighted returns are included.

• Time-weighted return is used to evaluate a manager's performance regardless of the size or timing of the investment funds. Investors consider this to be a true indicator of portfolio performance.
• Money-weighted return measures an account's performance, considering the timing and amount of cash flow of underlying investments. The discount rate sets the present value of future cash flows at the same level as the initial investment.

5. Advertising guidelines

Firms aren't required to follow these guidelines when creating advertisements. However, when making an advertisement claiming GIPS compliance, they must follow its advertising guidelines or include a GIPS report.

GIPS Standards for Asset Holders

These standards are for asset owners that only report their performance to an oversight body. They are not for asset owners that compete for business. Those that do compete for business must comply with the GIPS for firms.

1. Fundamentals of compliance

The asset owner must be properly defined. The asset owner is responsible for presenting relevant and accurate information to its oversight body.

2. Input data and calculation methodology

The data presented to the oversight body must be consistent and transparent, inputted and calculated in compliance with GIPS.

3. Total fund and composite maintenance

The created total fund must be properly maintained, and its information must be presented to the oversight body.

A total fund usually consists of underlying portfolios representing the strategies used to achieve the asset owner's investment goals.

4. Reporting

It's required to present time-weighted returns for total funds. However, it's optional to include money-weighted returns in GIPS Asset Owner Reports for total funds.

5. Advertising guidelines

To claim GIPS compliance, advertisements must follow the GIPS Advertising Guidelines or include a GIPS Asset Owner Report.

GIPS Standards for Verifiers

A verifier assures that a firm's or asset owner's policies and procedures regarding the total fund, composite, and pooled fund maintenance, calculation, presentation, and distribution of performance have been designed in compliance with GIPS.

Verifiers must comply with the following points outlined in the GIPS Standards for Verifiers.

1. Verification

• Purpose of Verification
• Verifier Qualification Requirements
• Scope of Verification
• Agreeing on the Terms of the Engagement
• Required Verification Procedures
• Maintenance of Verifier Documentation
• Representation Letter
• Verification Report
• Recommendation Letter

2. Performance Examination

• Purpose and Scope of Performance Examination
• Verifier Qualification Requirements
• Agreeing on the Terms of the Engagement
• Required Performance Examination Procedures
• Maintenance of Verifier Documentation
• Representation Letter
• Performance Examination Report
• Recommendation Letter

Verification

It provides additional confidence in a firm's claim of compliance with GIPS to prospective and current clients and investors. A qualified independent third party must perform the verification.

Verifiers must have appropriate professional abilities, experience, and a practical level of expertise. In addition, they must be knowledgeable about GIPS and all relevant and applicable laws and regulations and understand all requirements.

A single verification report is issued for the entire firm. Verifications can be conducted for a minimum of one year (or from the firm's inception through the end of the period, if less than one year).

Term agreements must be reached between the verifier and the firm before the engagement begins. An engagement letter or other suitable form of the written agreement must specify the terms of the engagement.

A verifier must maintain documentation supporting the verification report, such as the results of all procedures and evidence for them, significant findings and conclusions, and any other supporting evidence required.

The verification report must conclude with a representation letter signed by the firm's management. It must also state whether the firm's policies and procedures comply with GIPS.

Once the verification is complete, the verifier should issue a letter to the firm describing any specific findings, recommendations, and other areas for improvement, as found by the result of the verification process.

Performance examination 

Besides verification, a firm may also opt to conduct a performance examination on a specific composite fund or pool. However, they can only be performed concurrently or after a completed verification.

Only a qualified independent third party may conduct a performance examination. Verifiers must follow applicable professional guidance and industry standards of practice when conducting a performance examination.

Term agreements must be reached between the verifier and the firm before the performance examination begins. An engagement letter or other suitable form of the written agreement must specify the terms of the engagement.

Performance examination has to be conducted under the required procedures concerning planning, sample selection of composites and pooled funds, and testing.

A verifier must maintain documentation supporting the verification report, such as the results of all procedures and evidence for them, significant findings and conclusions, and any other supporting evidence required.

The performance examination report must conclude with a representation letter signed by the firm's management. It must also state whether the firm's policies and procedures comply with GIPS.

The performance examination report may be prepared as either a combined report along with the verification report or as a separate report attached to the verification report.

Benefits of GIPS Compliance

While it's voluntary for investment companies to apply for GIPS, there are many benefits to being GIPS compliant.

1. Marketing

Searches on major investor/consultant databases tend to exclude firms that aren't GIPS-compliant. For example, on eVestment, ⅔ of all searches exclude nonGIPS-compliant firms.

eVestment is partnered with 80% of the world's top 50 consultants. Therefore, being excluded from being searched within their database could be detrimental to potential clients finding one's investment firm.

2. Consistency

Firms that aren't GIPS compliant have many inconsistencies due to their non-standardized way of recording fees, accruing income, and determining valuation, among others. Consistency helps identify and correct these issues.

3. Prestige

Being GIPS-compliant shows that a firm follows the same standards as other larger and more renowned investment firms, placing them in the same category.

4. Efficiency

It helps address situations that occur in a dynamic investment industry. Following proven methods required by GIPS allows a firm to be more efficient in its operations by establishing robust investment policies and procedures.

5. Globalization

These standards are global. This helps investment managers from different countries present and analyze market returns without making firm- or location-specific adjustments in their analysis or presentation.

6. Confidence

Investing performance standards assure investors and beneficiaries that a firm's and asset owner's performance is accurate and transparent. This increases client confidence in the firm's operations and fund management.

Why do global investment performance standards exist?

Investment performance should be standardized due to the growth of financial entities, the Globalization of the investment process, and increased competition among investment management firms.

In countries with minimal or no investment performance standards, firms can compete for business on an equal footing with those from countries that do. Standardization allows firms to follow the same procedures in all aspects of investing and fund management.

Investment performance standards help organizations present the firm's and asset owner's investment performance completely and fairly to their investors and beneficiaries.

With a global investment performance standard, investment firms and asset owners can have greater confidence in the performance information they provide to clients and investors.

Global investment performance standards increase confidence in performance information presented to prospective and existing clients of investment firms and asset owners.

While these standards help firms in countless ways, currently, GIPS standards do not cover every aspect of performance measurement but will continue to expand over time. The CFA institute works with multiple global firms to continue improving GIPS.

Having so many firms comply with GIPS benefits everyone since more people are giving their input, findings, and insight on how to continue expanding GIPS to benefit firms and their current and potential clients.

Researched and authored by Gilberto Morales | LinkedIn

Reviewed and edited by Parul Gupta | LinkedIn

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