The Global Investment Performance Standards is a set of rules that specify how to present past performance to prospective clients or to key stakeholders. They were developed partly to avoid countries developing their own standards. They create, in a sense, a “level playing field” for asset managers to compete globally.
For the prospective client, a reasonable question when seeing such materials would be “are these the returns I would have likely gotten, had I been your client during this period?”
To provide such an answer, we would expect the returns to be “representative” of what, in a sense, the average client did. But cherry-picked returns would likely not meet this expectation. Furthermore, if a firm uses a “representative portfolio” or “model results,” we might again question the relevance of the reported returns.
In response to these initial promotions, the Financial Analysts Federation (FAF) formed a Blue Ribbon Committee to develop some rules. A draft of their “standard” was published in the Financial Analysts Journal in 1987. Three years later, the FAF merged with the Institute of Chartered Financial Analysts (ICFA) to form the Association for Investment Management and Research (AIMR). And, in 1993, AIMR completed what the FAF began by introducing the AIMR Performance Presentation Standards (AIMR-PPS®). These were geared primarily for the United States and Canada.
Almost immediately, other countries began to see what was occurring and decided to develop their own presentation standards. In response, AIMR formed a global committee, and began work on a single standard.
In the mid 1990s, AIMR changed its name to the CFA Institute. And, in 1999, the Global Investment Performance Standards (GIPS) were published. Many countries immediately endorsed the Standards.
The GIPS standards were revised in 2005 and 2010, and now will have its third revision in 2020.
The Standards require compliance at the “firm” level. And firms are allowed to define themselves in a variety of ways. There is no requirement that the “firm” be a “legal entity.” It can be a division of a corporation, for example. The key is that the “firm,” for GIPS standards purposes, holds itself out separately from the other parts of the organization as a distinct business entity
To avoid some of the problems that started to surface in the mid-1980s (such as cherry-picking), the Standards require the use of “composites.” A composite is a collection of portfolios that are managed in a similar fashion. For example, the firm might have a Global Equity composite, which includes all of the portfolios that are managed to this strategy.
A key requirement is that all actual, fee-paying, discretionary portfolios must be included in at least one composite:
In most cases, the Standards require firms to calculate time-weighted rates of return for the portfolios. The rules governing calculations have changed over the years. Today, a minimum of monthly valuations is required. In addition, firms must revalue portfolios for “large” external cash flows, where the firm defines what “large” is. This is done to ensure returns are as accurate as possible. We expect a firm’s definition of large to vary from 0.0% (meaning they value for all external cash flows or even daily) to 10.0 percent.
“Large” cash flows should not be confused with “significant” cash flows. Firms have the option to take advantage of significant cash flows, which allow them to temporarily remove portfolios from composites when sizable flows occur, which could cause the portfolio to be temporarily not representative of the composite’s strategy. This may occur with less liquid investments, where
We use the term “external” cash flows to mean cash and or securities coming into or leaving the portfolio. “Internal” cash flows refer to buys, sells, corporate actions, etc., that occur within the corpus of the portfolio. The Standards do not deal with “internal” cash flows, and so, when we simply use the term “cash flows,” it should be understood to mean “external.”
the ability to buy or sell might require several days, or even weeks.
Composite returns are derived by “asset-weighting” the individual portfolios. There are three methods to do this:
For certain asset classes (e.g., private equity and real estate) and under certain conditions, the internal rate of return (IRR) is required.
In addition, firms are required to report a measure of annual dispersion (across portfolios present for the full year, but this is only required if there were six or more portfolios present the full year), as well as the 36-month ex post annualized standard deviation for all years from 2011 forward, for both the composite and benchmark.
A key requirement of the GIPS standards is that firms are obligated to have written policies and procedures that govern their compliance, both their achievement and maintenance of compliance.
These P&P cover quite a bit, including:
Firms claiming GIPS compliance must abide by everything in the Standards.
In addition to the Standards, there are several “guidance statements.” These provide greater detail on the rules. Compliant firms must abide by these, as well.
And, as you’d expect, there are many “Q&As” that have been, and continue to be, published. If a firm claims compliance with the Standards, they must abide by these, too.