Exploring Global Investment Performance Standards | GIPS
Abstract
The GIPS® standards are a set of voluntary, ethical standards for calculating and presenting investment performance based on the principles of fair representation and full disclosure. The GIPS® standards have many features, calculations, history, benefits, and challenges that make them unique and valuable for the investment industry and its participants. The GIPS® standards are the recognized standard for investment performance around the world, and compliance with them can provide a firm’s “passport” to market investment management services globally.
Time to read: 5 to 7 minutes.
Level: Fundamental.
Category: Education Note.
GIPS Standards: What They Are, How They Evolved, and Why They Matter for Investors
If you are an investment manager or an investor, you may have heard of the Global Investment Performance Standards (GIPS®) and wondered what they are and why they matter. We will explain the basics of the GIPS® standards, history, their features, calculations, usefulness, and other key issues.
The GIPS standards have a long and rich history that spans more than three decades. The origins of the GIPS standards can be traced back to 1987, when the Association for Investment Management and Research (AIMR), the predecessor of the CFA Institute, developed the AIMR® Performance Presentation Standards (AIMR-PPS) for investment firms in the US and Canada. In 1995, AIMR® formed a Global Investment Performance Standards Committee to work on developing global standards based on the AIMR-PPS. In 1999, the first edition of the GIPS® standards was published, and the Global Investment Performance Standards Committee was replaced by the Investment Performance Council (IPC) to further develop and promote the GIPS standards. In 2005, the CFA Institute approved the second edition of the GIPS standards, which converged the AIMR-PPS and the GIPS® standards. In 2010, the CFA Institute released the third edition of the GIPS standards, which introduced significant changes and enhancements. In 2019, the CFA Institute published the fourth and current edition of the GIPS® standards, which simplified and streamlined the requirements and recommendations.
The GIPS® standards are a set of voluntary, ethical standards for calculating and presenting investment performance based on the principles of fair representation and full disclosure. The goal of the standards is to make it possible for investors to compare one firm’s performance against that of another firm, regardless of where they are located or how they operate. The GIPS® standards were created by the CFA Institute, a global association for investment management professionals, and are governed by the GIPS Executive Committee.
How the GIPS Standards Enhance Investment Performance Reporting and Comparability
The GIPS® standards have several features that distinguish them from other performance standards or regulations. Some of the main features are:
They are global and universal. The GIPS® standards apply to all types of investment strategies, asset classes, and markets, and can be adopted by any investment firm or asset owner in any country.
They are voluntary and ethical. The GIPS® standards are not legally binding or enforceable, but rather reflect the best practices and ethical principles of the investment industry. Firms that claim compliance with the GIPS standards demonstrate their commitment to transparency and integrity, and gain credibility and trust from investors and regulators.
They are comprehensive and consistent. The GIPS® standards cover all aspects of performance calculation and presentation, including input data, valuation, return methodology, composite construction, disclosure, and reporting. The GIPS® standards also provide guidance on specific topics, such as advertising, risk, real estate, private equity, and asset owners. The GIPS® standards ensure that performance results are comparable and consistent across firms and over time.
They are dynamic and evolving. The GIPS® standards are regularly reviewed and updated to reflect the changes and challenges of the investment industry. The GIPS® standards also incorporate feedback and input from various stakeholders, such as practitioners, regulators, verifiers, and investors. The latest version of the GIPS® standards, known as the 2020 edition, was released in June 2019 and became effective on January 1, 2020.
The GIPS® standards mandate the use of certain calculation methodologies to facilitate comparability. The Input Data and Calculation Methodology section of the GIPS standards addresses these topics. Some of the key calculation requirements are:
Returns for periods of less than one year must not be annualized.
Returns from cash and cash equivalents must be included in all total return calculations.
Returns must be calculated after the deduction of transaction costs.
Assets must be valued using a fair value methodology.
Portfolios must be valued at least monthly and on the date of all large external cash flows.
Trade-date accounting must be used for all transactions.
Time-weighted returns must be used for all portfolios, except for private equity and closed-end real estate funds, which must use money-weighted returns.
Composite returns must be calculated by asset-weighting the individual portfolio returns using beginning-of-period values or a method that reflects both beginning-of-period values and external cash flows.
Pooled fund returns must be calculated by time-weighting the individual share class returns using beginning-of-period shares or a method that reflects both beginning-of-period shares and external cash flows.
The GIPS® standards provide many benefits to the investment industry and its participants. Some of the main benefits are:
For investment firms, the GIPS® standards can help them gain a competitive edge, attract, and retain clients, reduce marketing costs, enhance reputation, and comply with regulatory expectations.
For asset owners, the GIPS® standards can help them evaluate and select investment managers, monitor, and measure performance, communicate results, and fulfill fiduciary duties.
For investors, the GIPS® standards can help them compare and analyze performance, make informed investment decisions, and increase confidence and trust in the investment industry.
For the investment industry, the GIPS® standards can help promote ethical behavior, improve transparency, foster innovation, and support market integrity.
The GIPS® standards are not without challenges and issues. Some of the common ones are:
The GIPS® standards are complex and technical, and may require significant time and resources to implement and maintain compliance.
The GIPS® standards are not mandatory or enforceable, and may not be recognized or accepted by all regulators, clients, or competitors.
The GIPS® standards are subject to interpretation and judgment, and may not address all the specific situations or questions that arise in practice.
The GIPS® standards are constantly evolving and changing, and may pose difficulties for firms to keep up with the new requirements and guidance.
The GIPS® standards are not a guarantee of quality or performance, and may not prevent fraud, misrepresentation, or manipulation.
A Guide for Firms, Asset Owners, and Verifiers
The GIPS® standards have different chapters for different types of entities that can claim compliance. The GIPS® Standards for Firms apply to investment management firms that offer their services to prospective clients through segregated accounts or pooled funds. The GIPS® Standards for Firms explain the fundamentals of compliance, the input data and calculation methodology, the composite and pooled fund maintenance, the reporting requirements, and the advertising guidelines.
The GIPS® Standards for Asset Owners apply to entities that manage investments on behalf of themselves or their affiliates, such as pension funds, endowments, foundations, and sovereign wealth funds. The GIPS® Standards for Asset Owners explain the scope of compliance, the input data and calculation methodology, the asset class and total fund maintenance, the reporting requirements, and the advertising guidelines.
The GIPS® Standards for Verifiers apply to third-party firms that provide verification and performance examination services to firms and asset owners that claim compliance with the GIPS® standards. The GIPS® Standards for Verifiers explain the objectives and scope of verification and performance examination, the roles and responsibilities of verifiers and clients, the verification and performance examination procedures, and the verification and performance examination reports.
References:
Carl R. Bacon, Practical Portfolio Performance Measurement and Attribution, 3rd ed. (Chichester: Wiley, 2020).
CFA Institute, Global Investment Performance Standards (GIPS).
Recommended Readings:
Carl R. Bacon, Practical Portfolio Performance Measurement and Attribution, 3rd ed. (Chichester: Wiley, 2020).
CFA Institute. Global Investment Performance Standards (GIPS®) for Firms: Explanation of the Provisions in Section 1. Charlottesville, VA: CFA Institute, 2020.
CFA Institute. Global Investment Performance Standards (GIPS®) for Asset Owners. Charlottesville, VA: CFA Institute, 2019.
CFA Institute. 2019. Global Investment Performance Standards (GIPS®) for Verifiers. Charlottesville, VA: CFA Institute.
