GIPS - 20 years after
In 1987, when the Financial Analysts Federation began to develop standards on how investment managers should present their performance to prospective clients, I doubt that they had any idea the impact their efforts would make.
Like a snowball rolling down hill, growing larger as it continues its journey, the presentation standards have grown and their impact is truly global.
And perhaps more amazing, we have moved from a situation where we had several country-specific standards to a single, global standard: the Global Investment Performance Standards (GIPS®), which more than 20 nations have agreed to adopt.
Getting to this point wasn’t easy. It took many hours of discussion, negotiation, and compromise. We didn’t agree on everything, but the benefits are huge.
With multiple standards, competing across borders could be a challenge for many asset managers. In addition, their prospective clients were often confused by the multitude of standards. And many asset managers found it difficult to distinguish between complying with their local standard and complying with GIPS.
In our most recent (2005) report, Performance Presentation Standards Survey, 91% of the participants either claimed compliance with GIPS or were planning to; this is a significant increase from our 2002 results when only 73% reported this. And perhaps even more significant is the increase over our 2000 survey, when only 57% were claiming compliance or planning to.
These results confirm our belief that GIPS had not taken hold until recently, confirming the confusion and lack of support for the global standard vis-à-vis the local ones.
Another interesting discovery was that 66% of last year’s participants comply with GIPS, versus 63% who comply with one or more country versions – GIPS has become the standard of choice.
Because all the countries with what used to be called country versions of GIPS (ie their local standard along with GIPS) have agreed to adopt GIPS, there are no local standards.
Thus, firms that had previously complied with their country standard should now adopt GIPS, and sponsors who used to inquire about compliance with the UK, Swiss, Irish, Italian, etc, standard should now simply ask if the prospective manager complies with GIPS.
This year not only brings us a single, universal standard for performance presentation but a new version of the standard. Originally code-named Gold GIPS, this new edition offers numerous changes over the original 1999 edition. Perhaps the most significant change has been the expansion of what the standards cover.
When first released, GIPS dealt with the basic aspects of presentation. That was probably not a bad idea as it’s easier to gain acceptance on a limited scope than trying to cover too much at one time.
This year we see the introduction of standards for both the real estate and private equity/venture capital sectors. While borrowing to an extent what was in the AIMR Performance Presentation Standards (AIMR-PPS®), these documents go well beyond what was originally required. Anyone marketing these products should review the details to insure compliance. We also have standards for how GIPS-compliant firms should advertise their performance.
While compliance is, to an extent, voluntary, any advertisement that references the GIPS standards must comply.
A firm can avoid compliance by not mentioning GIPS in their ad, but should weigh the value of that in relationship to complying with these straightforward rules.
One of the more ticklish items of the standards has been the question of mandatory verification. Verification is essentially the act of a compliant firm of bringing in an independent third-party to check them out.
While the original 1999 version indicated that mandatory verification was a likely event, and many continue support it, it has not been implemented yet because of overwhelming opposition.
Our survey provides additional testimony of the lack support, with the majority of participants now opposing it compared with our earlier survey. Many are hoping that mandatory verification will be adopted in 2010, but only time will tell.
But one might wonder why we would need mandatory verification given that degree of voluntary adoption.
While we are not surprised to see an increase in the number of verifications, the important figure is the steady drop in the number of firms who said they didn’t intend to undergo verification (28% in 2000; 18% in 2002; 8% in 2005). Our conclusion is that the market works; why make verification mandatory? But, we know it’s not quite that simple, so expect the discussion to continue.
The group that used to oversee these standards was the Investment Performance Council (IPC). This international body, along with its various subcommittees, steered the standards through its expansion, revision, and now adoption as the single global standard. Because of the desire to increase representation from the various country sponsors, the IPC decided last year to create a new structure.
To facilitate this increased representation of country sponsors, three regional subcommittees were created – Europe, Middle East and Africa (EMEA); the Americas; and Asia/Pacific.
Each country that has formally adopted GIPS has a seat on their respective regional investment performance subcommittee (RIPS). Each country also has a seat at the new GIPS council. In addition, each country votes on a chair for this council.
Another new group, the executive committee (EC), now has responsibility for the standards. It has nine members: a representative from each of the three RIPS; the chair of the GIPS council; a representative from the CFA Institute, who serves as chair; the chair of the interpretations subcommittee, and three individuals representing various stakeholders (investment manager, verifier/practitioner, investors/consultants). Figure 4 shows the relationship between these groups.
Just 20 years after a ‘blue ribbon’ committee set out to develop rules for presenting returns, we have a global standard; GIPS has become the standard for how asset managers should present their performance to prospects.
While the standards are (and will continue to be) voluntary, they afford the industry with many benefits.
Anyone involved with the standards needs to continue to keep abreast of them, as more changes are anticipated.
David Spaulding is president of the Spaulding Group, based in Somerset NJ