What is GIPS®?
The Global Investment Performance Standards (GIPS®) are ethical standards for investment performance presentation to ensure fair representation and full disclosure of investment performance. Firms must take all steps necessary to ensure that they have satisfied all the applicable requirement of the GIPS standards before claiming compliance.
Becoming GIPS Compliant
Many firms are interested in becoming GIPS compliant, but are unaware of what is needed to bring their firm into compliance. The information provided here is intended to provide you with a high-level overview of the steps you must complete to become GIPS compliant.
There are three critical components to GIPS that all firms must complete prior to claiming compliance with GIPS. Firms must:
- Document their firm-wide GIPS policies and procedures
- Construct composites (whether marketed or not) that consistently follow these firm GIPS policies and procedures
- Create the required GIPS Reports (whether marketed or not) to show the results of each composite.
Documenting Firm-wide GIPS Policies and Procedures
Firms are required to document how they comply with the GIPS requirements, in a document known as the firm’s GIPS Policies and Procedures (“GIPS P&P”). This document acts as the firm’s guide on how they implement and maintain their GIPS compliance across the organization. The following are a few of the key items to include in your GIPS P&P:
- Firm Definition – GIPS is applied to your firm as a whole, not to a single product or strategy you manage. How your firm is defined for GIPS purposes is primarily based on how the firm is held out to the public, which may differ from the legal structure of your firm.
- Definition of GIPS Discretion – GIPS Discretion is defined differently than it typically is for legal or regulatory purposes. For example, you may have a discretionary contract for an account that you deem to be non-discretionary for GIPS purposes because of restrictions the client places on the implementation of the strategy. Your firm’s GIPS P&P should outline the criteria for determining the discretionary status of accounts. All fee paying GIPS discretionary accounts must be included in a composite.
- Calculation Methodology – While GIPS provides a framework for how to calculate performance, firms may have different methods for handling minimum asset requirements, inclusion/exclusion timing policies, cash flows, internal dispersion, etc. The specifics of the methods used must be documented in your GIPS P&P.
- Composite Definitions and Rules – Firms must create policies and procedures to ensure that accounts are placed in the appropriate composite for the correct time period. The timing of the movement of accounts in or out of composites must be based on objective criteria that is outlined in this section of your GIPS P&P. Other optional rules, such as minimum account sizes and significant cash flow thresholds can also be documented here to keep accounts out of composites during periods where the intended strategy cannot be fully implemented.
- Error Correction Policies – Firms must create materiality thresholds that pre-determine the action required if errors occur in a compliant presentation. This section should include thresholds for all statistics as well as criteria for determining when errors in disclosures are material.
After the GIPS P&P is created, firms can use these policies to construct the composites defined in the policy document. Composites are not determined by marketed status, and is not unusual for firms to have multiple composites that are not marketed for various reasons. Firms may begin by:
- Identifying all of the accounts that meet the definition of a composite in accordance with the firm’s GIPS P&P. Portfolios must only be included in composites for periods in which they were considered discretionary for GIPS purposes, and meet the composite definition.
- Asset-weight the monthly account-level results for each account included in the composite to calculate the composite-level performance results and calculate all required composite-level statistics that must be included in the composite’s GIPS Report.
Creating GIPS Composite Reports
GIPS Reports act as the firm’s external representation of their GIPS compliance and must be provided to all prospective clients. Each composite has a separate presentation (irrespective of marketing status) that includes all of the required statistics and disclosures. Statistics included, but not limited to, in a GIPS Report include:
- Annual composite performance
- Annual benchmark performance
- Number of accounts in the composite as of each year-end
- Total assets in the composite as of each year-end
- Total assets of the GIPS firm as of each year-end
- A measure of internal dispersion for each annual period
- Three year annualized ex-post standard deviation of both the composite and the benchmark based on monthly returns
- Other statistics may also be required such as the percentage of non-fee paying accounts, carve-outs, or the percentage of bundled fee paying accounts as of each year-end, where applicable.
Claiming Compliance and Verification
Once claiming compliance with GIPS, firms may choose to have an independent third-party verification. Verification is a process by which a verification firm (verifier) conducts testing of a firm on a firm-wide basis in accordance with the required verification procedures of the GIPS standards. Verification provides assurance on whether the firm’s GIPS P&Ps related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. The value of verification is widely recognized, and being verified is considered to be best practice.
In addition to verification, firms may also choose to have specifically focused testing of a composite or pooled fund (performance examination) performed by an independent third-party verifier to provide additional assurance regarding the performance of a particular composite or pooled fund.
If you have any questions about how to become verified for GIPS compliance, we would love to help. Please contact us with any questions!