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Global Investment Performance Standards: Benefits and Guidelines

Published on July 8, 2019 by Jayraj Gohil and Sachith Vijayaraghavan

The asset management industry is growing and becoming increasingly competitive, making it a challenge for asset managers to win clients. We believe, therefore, that performance records of asset managers or their products/managed portfolios play a vital role in pursuing clients.

The Global Investment Performance Standards (GIPS) created by the CFA Institute, a global association of investment professionals, are voluntary standards used by investment managers globally. This article sheds light on what GIPS are, the guidelines, and how they benefit asset managers and investors.

Although compliance with the standards is voluntary, most clients tend to favor firms that abide by them due to the transparency and accuracy of data involved. Clients of GIPS-compliant investment firms gain access to a firm’s performance on investment strategies, enabling them to compare these with another firm’s. These numbers are calculated using GIPS principles, the details of which can be found here.

The following are some of the benefits offered by GIPS:

Transparency:

GIPS include making a composite presentation of an investment firm, including performance numbers derived using a standard methodology. This provides data transparency, making it easier for potential/existing investors to understand and analyze a firm.

Accuracy:

Accuracy of performance data instills confidence in investors.

Consistency:

Consistency of the methodology used and the data input to calculate performance is vital for a fair presentation, making the investment decision-making process easier.

Comparison:

GIPS enable investors to compare the track record of one portfolio with another, as the same methodology and parameters are used.

Global acceptance:

GIPS, therefore, are a set of standards that benefit both investment managers and investors.

Benefits in the investment world, however, always have associated guidelines that need to be followed. The following guidelines need to be adhered to if a firm is to be GIPS-compliant:

  • The definition of the firm has to be disclosed to make a composite presentation to clients

  • The composite performance must be in the format of one-, three- and five-year annualized returns. Firms need to provide performance data since their inception date if composite returns are available only for a period of less than five years

  • The end date of the performance period must be mentioned clearly

  • Returns for a period of less than one year must not be annualized

  • Annualized returns since the date of the firm’s inception must be provided if the firm has been in existence for a period of less than five years

  • Returns must be clearly identified, whether presented gross of fees or net of fees

  • The currency in which the returns are calculated must be identified

  • Supplemental information (for example, portfolio holdings, beta, and the sharp ratio) must be provided with the note

  • The benchmark must be the same as that indicated in the composite presentation, and the performance period must match that of the composite presentation

The SEC will come down hard on firms that claim compliance with GIPS but do not follow the guidelines. According to a May 2014 SEC ruling, such a firm violates sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940. Investment firms also need strong compliance support, such as marketing and advertising compliance support, to ensure they do not violate SEC rules.

Acuity Knowledge Partners is an influential player in the global market, providing compliance expertise and a wide range of other services. We are knowledgeable in mitigating risks inherent in advertising/marketing material, in line with SEC guidelines and regulations. Please refer to Acuity Knowledge Partners compliance offerings in detail at here.

We also have a pool of talented staff experienced in identifying risks inherent in marketing material, including risks relating to GIPS performance guidelines. We believe GIPS-compliant firms require the expertise of marketing compliance to follow GIPS advertising guidelines, mainly from a disclosure perspective.

Over 1,600 large and small investment management firms globally complied with GIPS in 2018, according to the GIPS official website.To know more about GIPS, please access the GIPS handbook.

Sources:

https://www.cfainstitute.org

https://www.gipsstandards.org

https://www.kmiig.com


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About the Authors

Delivery Manager, Compliance Operations

Jayraj Gohil has over 10+ years of experience in compliance, having worked for various firms including State Street Global Advisors and Goldman Sachs. His expertise spans across the risk and compliance sector, focusing on compliance reviews of marketing/advertising materials. At Acuity Knowledge Partners he is part of the central compliance team and specializing in marketing material review. Jayraj is an MBA from Global Academy of Technology, Bengaluru (VTU).

Senior Associate, Compliance Operations

Sachith Vijayaraghavan has 7 years of experience in compliance and has completed 5 years with Acuity Knowledge Partners. His expertise spans across the risk and compliance sector, focusing on compliance reviews of marketing/advertising materials and Email Surveillance. At Acuity Knowledge Partners he is part of the central compliance team and specializing in marketing material review. Sachith is an MBA from Bharathiyar University.

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