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      The premier performance standards

      The premier performance standards

      Today most investors expect firms to be GIPS® compliant and rely on performance reports that are both accurate and verified. Where does GIPS® stand today and what do clients care most about? At a conference in Luxembourg, Iain MacAra, Director at CFA (Chartered Financial Analyst), Global Investment Performance Standards (GIPS®) spoke to LFF about these global standards.

      What does GIPS® stand for?

      Literally what it stands for: Global Investment Performance Standards. It is a voluntary set of standards that govern the calculation and the presentation of investment results. It is a little bit more than that as well. It has some specific requirements about valuations and the way you should interpret the input data that goes into coming up with the returns that are then used in the calculation and presentation.

      What areas does GIPS® cover?

      Anything you could apply a fair value to can be included within the GIPS framework. It is all asset classes, which is to say the traditional ones but also the so-called alternative asset structures like private equity and real estate.

      Where does GIPS® stand today?

      It has evolved because the markets have evolved. You have to keep up to stay relevant, so you evolve with the times. There are now 35 country sponsors for GIPS® and we have seven countries that are interested in becoming country sponsors, so the interest is out there.

      In terms of is it being picked up by people, you will see request for proposals (RFPs), which ask: are you compliant with GIPS®, yes or no? So it is definitely a question that those who are aware of the standards are asking. It sets a benchmark.

      The GIPS® standards are voluntary. How can you put pressure on investment firms and asset managers to be compliant?

      Certainly one way of getting the marketplace interested is by meeting with people and letting them know what it stands for. Though it is voluntary, we do speak with regulators and with large institutional managers who look at this as being the baseline that they wish their managers be following. So the pressure comes from the marketplace.

      There is a survey produced by a verification company and it says that 80% of RFPs ask if you are GIPS compliant or not. So that puts the pressure on people; if they don’t know what it is, they will want to know what it means and they can go and research it.

      At the CFA institute we have websites, newsletters, helpdesks, all manner of ways so that those who want to know more about this can have easy access to the information.

      Did the financial crisis help to boost the standards?

      The financial crisis clearly made people focus on the bigger picture to start with. But definitely as the dust settles, people are looking around and asking: how can we make sure this is controlled? And the standards are a good way to know whether people have those controls. If they claim compliance and are verified, which is an independent third party attestation, it is a good indication that they have that area under control.

      How essential is third party verification?

      It is not mandatory. We have voluntary standards and voluntary third party attestation. The key thing to remember with verification is that it is checking that if you have the policies and procedures in place to be compliant. It doesn’t say that you are compliant but that you are able to be so because you are following the correct policies and procedures. We should remember that it is firm wide; it is not for a specific product.

      It covers the whole entity that is claiming compliance. There are two ways to look at it. You could think of it as somebody coming in and simply checking the box. I prefer to think of it as an independent third party who is available to give valuable feedback into your process, but they still have to remain independent.

      What could be reasons for a firm not to be compliant?

      To claim compliance, you need five years of history. You don’t have to go back and go through five years of books. If you wake up tomorrow and say “I want to claim compliance”, in five years’ time, if you have everything sorted out, you could then claim compliance.

      And it is not a waste to have to wait for five years because you are building that track record in a compliant fashion. Some people might be put off by thinking it is too complex; but it really isn’t.

      While GIPS® is about presenting information to prospective clients, it uses existing portfolios. So the quality that goes into those portfolios is relevant to the existing clients.

      How do customers see GIPS and which aspects do they care the most about?

      The retail investors obviously have regulation, prospectuses, KIID, and all sorts of other things working for them. They care about the information that GIPS presents or controls but they don’t yet realise that GIPS covers it.

      On the institutional side, the proof is that it is asked in the RFPs and prospective clients want to know and see. One of our goals is to address clients’ needs and make sure that the investors can see what GIPS is all about. CW