Many investment management firms tout that they are GIPS compliant. So what is GIPS, and why wouldꦬ a firm voluntarily choose to comply with the GIPS standards?

These are some of the questions we’ll answer in this brief overview of the Global Investment Performance Standards (GIPS), which are promulgated by the Investment Performance Council of the 澳洲幸运5官方开奖结果体彩网:CFA Institute.

Brief History of♊ Global Investment Performance Standards (♔GIPS)

GIPS are ethical standards that apply to the way 澳洲幸运5官方开奖结果体彩网:investment performance is presented to potential and existing clients. The predecessors to GIPS were the Association for Investment Management and Research-Performance Presentation Standards (AIMR-PPS). The original AIMR-PPS handbook was published in🦩 1993, but these ethical standards were not as global in their scope as the current GIPS.

In 1995, the AIMR formed a GIPS committee to work on developing global standards, and by 1999, the first edition of GIPS had been published. At this time, the CFA Institute (then known as the Assoꦗciation for Investment Management and Research) also established the Investment Performance Council (IPC) to further develop the standards.

By 2005, the CFA Institute had approved the new edition of GIPS and moved toward the convergence of the PPS and GIPS with an official 澳洲幸运5官方开奖结果体彩网:effective date of Jan. 1, 2006. As of that date, the AIMR-PPS ceased to exist, and AꦰIMR-compliant firms were encoura💜ged to become GIPS compliant.

Why Move to a Global Standard?

The 澳洲幸运5官方开奖结果体彩网:investment management industry is becoming more global. Many asset managers compete for business not only in their home markets but in foreign markets as well. The North American and Western European markets are very well developed, but other markets are catching up and becoming more sophisticated as well. For investment firms outside the United States or the 澳洲幸运5官方开奖结果体彩网:European Union, being GIPS compliant can provide legitimacy and give investors confidence that the firm strives to meet th❀e highest 🥂standards.

Being GIPS compliant can actually make things easi👍er for firms that are trying to compete in multiple markets, because they only have to abide by one set of standards and can avoid having to make major changes in their presentation or calculation methods when working in other countries. In other words, GIPS fill꧒s a need for standardization across a far-flung industry.

Steps to GIPS Compliance

GIPS are standards, not laws. Firms do not have to be GIPS compliant. Furthermore, these standards are not codified into 澳洲幸运5官方开奖结果体彩网:U.S. securities law. However, althou🎐gh they are voluntary, they provide discipline to the calculation and confidence in the pe🍷rformance represented.

Before performance is calculated and presented, there is some groundwork for the firm to do. The first thing a firm must do is actually define the firm. This may sound very obvious, but there might be legitimate reasons that a 澳洲幸运5官方开奖结果体彩网:subsidiary would be excluded from a firm definition.

The next step involves a firm’s 澳洲幸运5官方开奖结果体彩网:composites. One of the most important things a firm can do is to define its composites in a logical and meaningful way. GIPS requires that all of a firm’s discretionary, fee-paying portfolios be included in at least one composite. The GIPS Handbook defines a composite as “an aggregation of one or more portfolios managed according to a similar investment mandate, 澳洲幸运5官方开奖结果体彩网:objective, or strategy”—think “emerging market equity” or “global fixed income.”

The provisions of the standards cover several other items, including calculation, presentations, and disclosures. For example, 澳洲幸运5官方开奖结果体彩网:time-weighted (as opposed to money-weighted) 澳洲幸运5官方开奖结果体彩网:rates of return are required. Some firms probably feel as though the largest part of their performance presentations are the GIPS-required 澳洲幸运5官方开奖结果体彩网:disclosures, as firms are required to disclose many items, including a definition of the firm, whether performance is net of fees or gross of fees, and w💟hat additional information must be disclosed upon reqꦆuest.

Fair Representation of Historical Performance

One of the stated objectives of GIPS deals with ensuring accurate and consistent investment perfoꦗrmance. The standards require firms to initially show a minimum of five years of GIPS-compliant history.

After this minimum, the firm must build up to a track record of 10 years. If the composite has been in existence for fewer than five years, the firm must show its entire history since inception. Because investors should always be wary of firms that show only the best years of their performance, this requirement should be able to stop the practice of cherry picking.

For example, an investment may look great if a firm only shows the last two years of performance, in which the investment experienced positive returns. However, suppose that the three years prior to this, the investment experienced 澳洲幸运5官方开奖结果体彩网:negative returns. If the firm did not reveal the investment’s earlier performance, investors would get a completely different impression of the firm’s 澳洲幸运5官方开奖结果体彩网:asset management abilities. Having a consistent standard helps investors make more informed choices and may increase their confidence in the 🔯investment manageme💃nt industry.

It may also encourage firms from dဣeveloped markets to be more comfortable dealing with firms from emerging markets that are GIPS compliant. When all firms follow the same standards, regardless of the region of investments, cross-investments and partnerships can be made easier.

Why Firms Choose to Be GIPS Compliant

It may seem that with all of the extra work involved, it would be a hassle for a firm to be GIPS compliant. However, because the GIPS standards have become so widely accepted, an institutional asset manager who is noncompliant may be at a competitive disadvantage. In the U.S., many 澳洲幸运5官方开奖结果体彩网:investment consultants will not even consider a firm’s investments for their 澳洲幸运5官方开奖结果体彩网:institutional clients if it is not GIPS compliant. GIPS ꦺcompliance also helps firms compete internationally.

Verification

Firms that claim compliance with GIPS can be independently verified by a 澳洲幸运5官方开奖结果体彩网:third party. Verification is voluntary at this point, but many firms choose to be verified to help identify gaps in procedures and to give clients peace of mind. There are firms that specializ🅷e in this type of verification and performance measurement consulting. Once a firm has been verifiedꦆ, it may add a disclosure stating such in its GIPS-compliant marketing materials.

The Bottom Line

An investment management firm’s clients or prospective clients can benefit from GIPS standards because they prov෴ide standards for investment performance, making it easier for investors to compare firms and make more informed decisions. The on the CFA website outlines more spec𝓡ifics of these standards.