What are the Global Investment Standards (GIPS)?
The Global Investment Performance Standards (GIPS) are a set of ethical principles used by investment management firms in order to establish a globally standardised, industry-wide approach to creating performance presentations that communicate investment results to prospective clients.
The underlying spirit of the Standards is fair representation and full disclosure. CFA Institute created and administers the Standards and partners with local country sponsors around the world to promote the Standards.
To facilitate and maintain the integrity of the GIPS standards, new performance standards are created as needed by the industry and new procedures and controls are implemented to ensure that the Standards are consistently applied, interpreted, and expanded with broad public comments.
Benefits
GIPS breaks down barriers to entry, acting as a 'passport' for fund managers to market their results worldwide. Standardising investment performance guidelines improves investors' ability to compare investment performance regardless of the investment manager's geographic location. This enhanced comparability assists investors aiming to invest across a variety of markets.
GIPS allows an investment manager's client to focus on the key issues such as investment style, attitude to risk and volatility etc.
This happens because the issues of performance calculation and presentation have been leveled by GIPS.
The Standards have become a pre-requisite for competing globally. Investment managers who made an early start on the compliance and verification path have gained recognition for the industry-wide global transparency of their performance reporting function, hence gleaning a competitive edge over their peers. The standard provides investors with added confidence in an investment manager's performance results as compliance enhances credibility.
The added value of being GIPS compliant gives pension fund trustees the confidence that they have all the objective information needed to make a thoughtful and considered assessment when selecting investment managers - precisely what was lacking in the past!
Finally, new businesses will look to invest only with GIPS compliant firms, as GIPS compliance becomes synonymous with investment management over the next few years.
Becoming GIPS Compliant
The GIPS standards are divided into eight sections that reflect the basic elements involved in presenting performance information: fundamentals of compliance, input data, calculation methodology, composite construction, disclosures, presentation and reporting, real estate, and private equity.
The provisions for each section are divided between requirements, listed first in each section, and recommendations. Firms must meet all the requirements to claim compliance with the GIPS standards. Firms are strongly encouraged to adopt and implement the recommendations to ensure that the firm fully adheres to the spirit and intent of the GIPS standards. Examples of GIPS-compliant presentations and a glossary of terms are included as appendices in the standards to assist the compliance effort.
Fundamentals of Compliance
Critical issues that a firm must consider when claiming compliance with the GIPS standards are defining the firm, documenting firm policies and procedures, maintaining compliance with updates to the GIPS standards, and properly using the claim of compliance and references to verification. The definition of the firm is the foundation for firm-wide compliance and creates defined boundaries whereby total firm assets can be determined. Once a firm meets all of the requirements of the GIPS standards, it must appropriately use the claim of compliance to state compliance with the GIPS standards.
Input Data
Consistency of input data is critical to effective compliance with the GIPS standards and establishes the foundation for full, fair, and comparable investment performance presentations.
Calculation Methodology
Achieving comparability among firms' performance presentations requires uniformity in methods used to calculate returns. The Standards mandate the use of certain calculation methodologies for both portfolios and composites.
Composite Construction
A composite is an aggregation of one or more portfolios into a single group that represents a particular investment objective or strategy. The composite return is the asset-weighted average of the performance results of all the portfolios in the composite. Creating meaningful, assetweighted composites is critical to the fair presentation, consistency, and comparability of results over time and among firms.
Disclosures
Disclosures allow firms to elaborate on the raw numbers provided in the presentation and give the end user of the presentation the proper context in which to understand the performance results. To comply with the GIPS standards, firms must disclose certain information about their performance presentation and policies adopted by the firm. Disclosures are to be considered static information that does not normally change from period to period. Although some disclosures are required of all firms, others are specific to certain circumstances and thus may not be required. No "negative assurance" language is needed for non-applicable disclosures.
Presentation and Reporting
After gathering the input data, calculating returns, constructing the composites, and determining the necessary disclosures, the firm must incorporate this information in presentations based on the requirements set out in the GIPS standards for presenting the investment performance returns. No finite set of provisions can cover all potential situations or anticipate future developments in investment industry structure, technology, products, or practices. When appropriate, firms have the responsibility to include other information not necessarily covered by the Standards in a GIPS-compliant presentation.
Real Estate
These provisions apply to all investments where returns are primarily from the holding, trading, development, or management of real estate assets. Real estate includes land, buildings under development, completed buildings, and other structures or improvements held for investment purposes. The provisions apply regardless of the level of control the firm has over management of the investment. The provisions apply irrespective of whether a real estate asset or investment is producing revenue. They also apply to real estate investments with leverage or gearing.
Private Equity
These provisions apply to all private equity investments other than open-end or evergreen funds (which must follow the main GIPS provisions). Private equity investments must be valued according to the GIPS private equity valuation principles. Private equity refers to investments in non-public companies that are in various stages of development and encompasses venture investing, buyout investing, and mezzanine investing. Fund-of-funds investing as well as secondary investing are also included in private equity. Investors typically invest in private equity assets either directly or through a fund of funds or limited partnership.
The Implications of GIPS
The GIPS standards must be applied with the goal of full disclosure and fair representation of investment performance. Meeting the objectives of full disclosure and fair representation will likely require more than compliance with the minimum requirements of the GIPS standards.Firms are encouraged to comply with the recommendations and must comply with all applicable requirements of the GIPS standards, including any clarifications, updates, reports, guidance statements, and questions and answers.
The history of GIPS
Investment practices, regulation, performance measurement, and reporting of performance results have historically varied considerably from country to country. Some countries had established performance calculation and presentation guidelines that are domestically accepted, and others have few standards for presenting investment performance.
These practices have limited the comparability of performance results between firms in different countries and, historically, have hindered the ability of firms to penetrate markets on a global basis. CFA Institute (formerly known as the Association for Investment Management and Research or AIMR) recognised the need for a global set of performance presentation standards, and in 1995, it sponsored and funded the Global Investment Performance Standards (GIPS) Committee to develop a single standard for presenting investment performance. In February 1999, the GIPS committee finalised the GIPS standards and presented them to the AIMR Board of Governors, who formally endorsed them. Although CFA Institute is funding and administering the activities of the GIPS standards, the success of the Standards is the result of an alliance among experts from a variety of fields within the global investment industry.
The performance measurement of investment portfolios has been an accepted part of the management control process following its introduction as an analytical tool in the 1960s. Beginning with a simple rate of return, performance measurement has developed over the years into a sophisticated and specialised product that now allows a detailed investigation and interpretation of performance via a plethora of statistical methods. However elaborate the methodology and analysis employed may be, the rate of return remains the single measure that is most commonly used by investment managers across all markets to present their performance track records. Until recently, there was no uniformity in the way such results were presented. The 'cherry-picking' of only the best performing portfolios for marketing purposes was a common complaint faced by all investment managers. This should no longer be an issue, as compliance with performance presentation standards will, over time, become an essential requirement for any investment manager attempting to sell their expertise to prospective clients both at home and further afield.
Performance standards are not a new phenomenon. They have existed in some form since the 1980s, although adherence by investment firms was for the most part limited. In the mid 1980s, concerns regarding the presentation of performance results led the members of the Financial Analysts Federation to develop a set of standards. Following the establishment of the Association for Investment Management and Research Performance Presentation Standards (AIMR-PPSTM) in 1990 in North America, the standards were reviewed by the industry prior to their formal implementation in 1993.
Encouraged by the success of the standards and interest shown from other countries outside North America, AIMR (now known as the CFA Institute) developed a set of standards that would be universally accepted. The formal adoption by AIMR of GIPS in 1999 has resulted in an increased awareness of the requirements for investment management firms to comply with performance presentation standards. The establishment of GIPS as the global minimum standard effectively means that performance results of managers can be compared with one another irrespective of their home base. GIPS amounts to objective global standards which fund managers can use to proclaim their own expertise in investment performance, at least where such a proclamation is justified. Above all, GIPS can be used by clients of investment managers to make a useful, objective assessment of investment performance achieved by different managers.
However, in order to maintain global relevance, the CFA has recognised the need to continually update the GIPS standards through interpretations, guidance statements and new provisions. Realising that the investment industry is constantly changing, the CFA believes the GIPS standards must be flexible at all times to remain effective - indicating a fine balance between consistently improving the standards and minimising undue disruption to firms that are claiming compliance, or are in the process of doing so.
The development of "Gold" GIPS in 2004 involved a review of the existing GIPS provisions in an effort to eliminate the need for separate investment performance standards in different jurisdictions. In the CFA's view, the "Gold" GIPS standards represent the highest quality and most rigorous performance presentation and measurement practices that firms can adopt.
On February 4th 2005, the CFA Institute Board of Governors approved the revised Global Investment Performance Standards, which created a single global standard of investment performance reporting and increased minimum standards worldwide. The revised GIPS standards represent the most comprehensive and significant upgrade to the Standards since their introduction in 1999.
The underlying spirit of the Standards is fair representation and full disclosure. CFA Institute created and administers the Standards and partners with local country sponsors around the world to promote the Standards.
To facilitate and maintain the integrity of the GIPS standards, new performance standards are created as needed by the industry and new procedures and controls are implemented to ensure that the Standards are consistently applied, interpreted, and expanded with broad public comments.
Benefits
GIPS breaks down barriers to entry, acting as a 'passport' for fund managers to market their results worldwide. Standardising investment performance guidelines improves investors' ability to compare investment performance regardless of the investment manager's geographic location. This enhanced comparability assists investors aiming to invest across a variety of markets.
GIPS allows an investment manager's client to focus on the key issues such as investment style, attitude to risk and volatility etc.
This happens because the issues of performance calculation and presentation have been leveled by GIPS.
The Standards have become a pre-requisite for competing globally. Investment managers who made an early start on the compliance and verification path have gained recognition for the industry-wide global transparency of their performance reporting function, hence gleaning a competitive edge over their peers. The standard provides investors with added confidence in an investment manager's performance results as compliance enhances credibility.
The added value of being GIPS compliant gives pension fund trustees the confidence that they have all the objective information needed to make a thoughtful and considered assessment when selecting investment managers - precisely what was lacking in the past!
Finally, new businesses will look to invest only with GIPS compliant firms, as GIPS compliance becomes synonymous with investment management over the next few years.
Becoming GIPS Compliant
The GIPS standards are divided into eight sections that reflect the basic elements involved in presenting performance information: fundamentals of compliance, input data, calculation methodology, composite construction, disclosures, presentation and reporting, real estate, and private equity.
The provisions for each section are divided between requirements, listed first in each section, and recommendations. Firms must meet all the requirements to claim compliance with the GIPS standards. Firms are strongly encouraged to adopt and implement the recommendations to ensure that the firm fully adheres to the spirit and intent of the GIPS standards. Examples of GIPS-compliant presentations and a glossary of terms are included as appendices in the standards to assist the compliance effort.
Fundamentals of Compliance
Critical issues that a firm must consider when claiming compliance with the GIPS standards are defining the firm, documenting firm policies and procedures, maintaining compliance with updates to the GIPS standards, and properly using the claim of compliance and references to verification. The definition of the firm is the foundation for firm-wide compliance and creates defined boundaries whereby total firm assets can be determined. Once a firm meets all of the requirements of the GIPS standards, it must appropriately use the claim of compliance to state compliance with the GIPS standards.
Input Data
Consistency of input data is critical to effective compliance with the GIPS standards and establishes the foundation for full, fair, and comparable investment performance presentations.
Calculation Methodology
Achieving comparability among firms' performance presentations requires uniformity in methods used to calculate returns. The Standards mandate the use of certain calculation methodologies for both portfolios and composites.
Composite Construction
A composite is an aggregation of one or more portfolios into a single group that represents a particular investment objective or strategy. The composite return is the asset-weighted average of the performance results of all the portfolios in the composite. Creating meaningful, assetweighted composites is critical to the fair presentation, consistency, and comparability of results over time and among firms.
Disclosures
Disclosures allow firms to elaborate on the raw numbers provided in the presentation and give the end user of the presentation the proper context in which to understand the performance results. To comply with the GIPS standards, firms must disclose certain information about their performance presentation and policies adopted by the firm. Disclosures are to be considered static information that does not normally change from period to period. Although some disclosures are required of all firms, others are specific to certain circumstances and thus may not be required. No "negative assurance" language is needed for non-applicable disclosures.
Presentation and Reporting
After gathering the input data, calculating returns, constructing the composites, and determining the necessary disclosures, the firm must incorporate this information in presentations based on the requirements set out in the GIPS standards for presenting the investment performance returns. No finite set of provisions can cover all potential situations or anticipate future developments in investment industry structure, technology, products, or practices. When appropriate, firms have the responsibility to include other information not necessarily covered by the Standards in a GIPS-compliant presentation.
Real Estate
These provisions apply to all investments where returns are primarily from the holding, trading, development, or management of real estate assets. Real estate includes land, buildings under development, completed buildings, and other structures or improvements held for investment purposes. The provisions apply regardless of the level of control the firm has over management of the investment. The provisions apply irrespective of whether a real estate asset or investment is producing revenue. They also apply to real estate investments with leverage or gearing.
Private Equity
These provisions apply to all private equity investments other than open-end or evergreen funds (which must follow the main GIPS provisions). Private equity investments must be valued according to the GIPS private equity valuation principles. Private equity refers to investments in non-public companies that are in various stages of development and encompasses venture investing, buyout investing, and mezzanine investing. Fund-of-funds investing as well as secondary investing are also included in private equity. Investors typically invest in private equity assets either directly or through a fund of funds or limited partnership.
The Implications of GIPS
The GIPS standards must be applied with the goal of full disclosure and fair representation of investment performance. Meeting the objectives of full disclosure and fair representation will likely require more than compliance with the minimum requirements of the GIPS standards.Firms are encouraged to comply with the recommendations and must comply with all applicable requirements of the GIPS standards, including any clarifications, updates, reports, guidance statements, and questions and answers.
The history of GIPS
Investment practices, regulation, performance measurement, and reporting of performance results have historically varied considerably from country to country. Some countries had established performance calculation and presentation guidelines that are domestically accepted, and others have few standards for presenting investment performance.
These practices have limited the comparability of performance results between firms in different countries and, historically, have hindered the ability of firms to penetrate markets on a global basis. CFA Institute (formerly known as the Association for Investment Management and Research or AIMR) recognised the need for a global set of performance presentation standards, and in 1995, it sponsored and funded the Global Investment Performance Standards (GIPS) Committee to develop a single standard for presenting investment performance. In February 1999, the GIPS committee finalised the GIPS standards and presented them to the AIMR Board of Governors, who formally endorsed them. Although CFA Institute is funding and administering the activities of the GIPS standards, the success of the Standards is the result of an alliance among experts from a variety of fields within the global investment industry.
The performance measurement of investment portfolios has been an accepted part of the management control process following its introduction as an analytical tool in the 1960s. Beginning with a simple rate of return, performance measurement has developed over the years into a sophisticated and specialised product that now allows a detailed investigation and interpretation of performance via a plethora of statistical methods. However elaborate the methodology and analysis employed may be, the rate of return remains the single measure that is most commonly used by investment managers across all markets to present their performance track records. Until recently, there was no uniformity in the way such results were presented. The 'cherry-picking' of only the best performing portfolios for marketing purposes was a common complaint faced by all investment managers. This should no longer be an issue, as compliance with performance presentation standards will, over time, become an essential requirement for any investment manager attempting to sell their expertise to prospective clients both at home and further afield.
Performance standards are not a new phenomenon. They have existed in some form since the 1980s, although adherence by investment firms was for the most part limited. In the mid 1980s, concerns regarding the presentation of performance results led the members of the Financial Analysts Federation to develop a set of standards. Following the establishment of the Association for Investment Management and Research Performance Presentation Standards (AIMR-PPSTM) in 1990 in North America, the standards were reviewed by the industry prior to their formal implementation in 1993.
Encouraged by the success of the standards and interest shown from other countries outside North America, AIMR (now known as the CFA Institute) developed a set of standards that would be universally accepted. The formal adoption by AIMR of GIPS in 1999 has resulted in an increased awareness of the requirements for investment management firms to comply with performance presentation standards. The establishment of GIPS as the global minimum standard effectively means that performance results of managers can be compared with one another irrespective of their home base. GIPS amounts to objective global standards which fund managers can use to proclaim their own expertise in investment performance, at least where such a proclamation is justified. Above all, GIPS can be used by clients of investment managers to make a useful, objective assessment of investment performance achieved by different managers.
However, in order to maintain global relevance, the CFA has recognised the need to continually update the GIPS standards through interpretations, guidance statements and new provisions. Realising that the investment industry is constantly changing, the CFA believes the GIPS standards must be flexible at all times to remain effective - indicating a fine balance between consistently improving the standards and minimising undue disruption to firms that are claiming compliance, or are in the process of doing so.
The development of "Gold" GIPS in 2004 involved a review of the existing GIPS provisions in an effort to eliminate the need for separate investment performance standards in different jurisdictions. In the CFA's view, the "Gold" GIPS standards represent the highest quality and most rigorous performance presentation and measurement practices that firms can adopt.
On February 4th 2005, the CFA Institute Board of Governors approved the revised Global Investment Performance Standards, which created a single global standard of investment performance reporting and increased minimum standards worldwide. The revised GIPS standards represent the most comprehensive and significant upgrade to the Standards since their introduction in 1999.
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