David Spaulding, The Spaulding Group
DSpaulding@SpauldingGrp.com

 

The Global Investment Performance Standards (GIPS®) is a valuable set of ethical guidelines as to how investment managers should provide their performance history to prospective clients. "Full disclosure" and consistency are key attributes of the standards. Institutional asset managers realize that they have become a de facto requirement in order to win new business. Managers who adhere to the standards help assure both prospective and existing investors that performance is complete and fairly presented, and instill confidence in the firm's results presented to them.
 
The GIPS reporting requirements benefit institutions searching for a new investment manager in many ways, including the ability to more accurately compare managers. A key aspect of the standards is "composites," which is the basis for reporting performance results. Composites are groups of accounts that have similar investment strategies and risk characteristics, and are the source of much of the information provided to prospects, including returns, dispersion, and risk. A compliant firm is required to provide its prospective investors with the appropriate composite's track record that aligns with the prospect's needs. Although composites are critically important, compliance is at the "firm" level: thus, all firm strategies, both marketed and non-marketed, must be brought into compliance.
 
The standards are quite complex and much interpretation is often required. Consequently, compliant firms and firms wishing to comply often rely on consultants and/or verifiers to provide guidance. Although a thorough knowledge of the standards is helpful, to provide greater confidence that the firm is actually compliant, the standards strongly recommend that firms claiming compliance undergo periodic "verifications." 
 
A GIPS verification assesses whether the firm has complied with the composite construction requirements, and confirms that their policies and procedures are designed to calculate and present performance consistently with the standards. While verification doesn't determine whether or not a firm is actually compliant, it nevertheless provides the firm, as well as its clients and prospects, added confidence in the manager's claim of compliance.
 
Asset managers benefit from the standards in that they provide a "level playing field" when competing for new business. They provide best practices for calculating and reporting results. Because the standards are global, with more than 30 countries endorsing them, they more easily allow firms to compete for business beyond their borders. There is plenty of evidence to show that compliance enhances a firm's ability to market its investment services. An added benefit is that they help firms become better organized in their performance calculating and reporting.
 
As already noted, the institutional market essentially mandates compliance, but compliance can also be beneficial when competing in other markets, such as retail, private banking, and alternative investments (e.g., private equity, real estate, hedge funds). In the institutional market, non-compliant firms are at a disadvantage: in these other markets, compliant firms are at an advantage.