The emergence of the framework for the Global Investment Performance Standards (GIPS) in February 1999 (available on the AIMR website at is positive news for all who have been frustrated by the use of performance data in marketing investment products.
The GIPS were designed by a global AIMR committee comprising members from 19 different countries and organisations such as AIMR and EFFAS, to provide a common global standard for measuring and presenting investment performance. A draft version of the GIPS had already been published in February 1998.
There is little doubt that the AIMR-PPS have contributed greatly toward the development of the GIPS. The AIMR-PPS had been developed for the US in the late 1980s. Even though many statements of the GIPS read as if they were taken directly from the AIMR-PPS, investment professionals familiar with the practical implications of PPS will recognise that in many of them have been strengthened or put in a more precise form in the GIPS.
The GIPS also require the disclosure of additional information, such as the total assets of the firm, the currency in which performance is expressed, any exchange rate inconsistencies relative to a benchmark, and for each composite the percentage invested in countries or regions not included in the benchmark. This is a considerable improvement over the AIMR-PPS, as this information enables potential trustees to receive important insights into the manager’s investment style and the risks that it entails.
Some of the requirements of the GIPS have effective dates in the future. They will further enhance its status as a global standard. For instance, from January 1 2005 firms must use trade date accounting and from January 1 2010 portfolios must be valued at the date of any cash flow. The implementation will certainly mean considerable time and expense for many firms. But with these additional requirements going into effect over the next decade, there will be an excellent basis for the GIPS to develop into a truly global standard. However, some issues remain on the route to achieving a higher universal performance presentation standard. The most fervent debate still surrounds the question of compliance verification.
The AIMR-PPS distinguish between two levels of verification. Level 1 verification requires independent attestation that each of the firm’s discretionary fee-paying portfolios is included in at least one composite and that the criteria for the definition of the composites are reasonable and applied consistently over time. Furthermore the general procedures for calculating returns etc must be checked. Level 2 verification is similar to a performance audit, where the accuracy of specific performance results etc is checked in detail.
The GIPS do not refer to two levels of verification but recommend a verification which resembles AIMR-PPS level 1 verification. Putting emphasis on the critical ‘Level 1 verification’ must be considered a step in the right direction, as the issues addressed at this lev-el are at the very core of the standards. In the original draft of the GIPS an even stricter compliance verification form was outlined, which combined level 1 and level 2 verification as a single verification form applicable to the entire firm. The PPS committee of the German Society of Investment Analysts and Asset Managers (DVFA) decided to keep the original draft for the verification in its standards for the German market (the DVFA-PPS), which are based on the GIPS. Compliance with DVFA-PPS implies compliance with GIPS. In some points, however, such as the verification, the DVFA-PPS are stricter than the GIPS.
Given the general progress in regard to the issue of verification there remains the question whether the verifiers (CPA firms, for example) have the ability to issue the required verification report. To address these concerns, the DVFA held a six-day seminar on PPS that has the specific goal of educating the verifiers. The focus of the seminar lies in the formation of composites and other practical issues. Educating (potential) verifiers in such a way might be a feasible way to address the concerns regarding the verification for other markets as well.
According to another survey of PricewaterhouseCoopers, 60% of the top European investment managers expect GIPS to become “equivalent to AIMR-PPS and fully accepted” over the next five years. As the universal PPS standard that will evolve from the convergence of the different existing standards is likely to be a stricter one than the current GIPS, investing in the required infrastructure will pay off in the long run.
Unlike the US, where compliance with PPS has almost become a must, in Europe and other markets compliance with GIPS or similar standards will mean a significant advantage over the next few years. Given the promulgation of the standards by organisations such as AIMR, DVFA and the media, sponsors and consultants have begun to pay a lot more attention to performance issues. In our opinion, European fund managers willing to tackle the difficult issue of getting into compliance with GIPS (or with a stricter standard such as the DVFA-PPS) at an early stage, will be able to obtain a competitive advantage in our demanding and rapidly growing industry.
With the creation of the GIPS the global AIMR-committee has created an excellent platform for a fair presentation of performance results, which can be developed into a universal standard in the future. The DVFA-PPS provide an excellent basis for European fund managers to compete in an increasingly competitive environment. We expect all top sponsors and top consultants in Europe to require investment managers to comply with PPS within a few years.
Ralf Bendheim is managing director at DIT Deutscher Investment-Trust, a member of the GIPS committee and one of the co-founders of the German DVFA committee for PPS. Bernd Fischer is a manager at the institutional asset management division of Dresdner Bank and a member of the DVFA committee for PPS