Global investment management firms face many challenges when reporting investment performance results to prospective and current clients. Investment practices, regulation, performance measurement, and reporting of performance results vary considerably from country to country. Some countries have established
performance calculation and presentation guidelines that are domestically accepted, while others have few or none.
The rapid globalisation of the investment industry has heightened the need for consistent, globally accepted standards for the calculation and presentation of investment performance.
The Association for Investment Management and Research (AIMR) recognised this need, and in 1995, sponsored and funded the Global Investment Performance Standards TM (GIPSTM) Committee to develop global standards for presenting investment performance. GIPS represent the effort of a diverse committee of investment professionals representing many global investment organisations. On February 14, 1999, the AIMR board of governors formally endorsed GIPS as the worldwide standard for investment managers to follow when presenting their investment performance record to prospective and current clients.
The AIMR Performance Presentation StandardsTM (AIMR-PPSTM), which have been embraced by the marketplace in the US, served as the basis for the development of GIPS. Crafted to meet the needs and capacity of a broad range of international markets, they are an evolutionary set of ethical standards based on the principles of full and fair disclosure. GIPS give investors confidence that a firm’s record is an accurate and complete picture of its historical performance achievement. Such a standard also facilitates competition in the global investment industry by allowing clients and potential clients to make an ‘apples to apples’ comparison of investment advisory firms.
To provide a practical and effective implementation structure for the new global performance standards and encourage wider public participation in its performance presentation standard-setting efforts, AIMR most recently established the Investment Performance Council (IPC). Although AIMR is funding and supporting the activities of the IPC, the IPC is the result of an alliance among experts from a variety of fields within the global investment industry. The council currently has representatives from 15 countries.
At its inaugural meeting in March 2000, the IPC addressed several administrative issues and established the goals and constitution of the group. There was much discussion surrounding the primary purpose of the IPC, which is to promote the adoption and implementation of a single investment performance presentation standard (GIPS) throughout the world as the common method for calculating and presenting investment performance. Worldwide acceptance of such a standard will help ensure the presentation of accurate and consistent investment performance in a fair, comparable format. A common standard will promote fair global competition between investment firms among all markets and help assure investors that the performance information is both complete and fairly presented. The IPC will look to all countries to adopt GIPS as the standard for investment firms seeking to present historical investment performance.
The IPC created two working groups at its first meeting to serve as standing subcommittees of the IPC. James Hollis, of the US serves as the chair of the interpretations subcommittee. This subcommittee will work to ensure the integrity, consistency and applicability of GIPS. Because GIPS were based on the AIMR-PPS standards and much interpretation has already been published on the application of the AIMR-PPS standards, the interpretations subcommittee will utilise many of the existing AIMR-PPS interpretations as a foundation to develop clear, precise guidance for the industry on several pertinent topics, such as portability, composite construction, and defining a global firm.
Carl Bacon, of the UK, chairs the verification subcommittee who acts as a forum for understanding verification issues and for deciding how verification is practically applied in the marketplace. It will also serve as a liaison with the interpretations subcommittee to dialogue on issues affecting investment management firms and verifiers. The IPC also created several technical subcommittees to address specific aspects of investment performance, such as venture capital, real estate, leverage and derivatives, and fees.
AIMR recognises that it is only through broad-based participation that the industry will adopt and adhere to performance standards. Therefore, all meetings of the IPC are open to the public, with proceedings and materials from the meeting available on the AIMR Web site. Regular, open meetings with significant public input are the critical way of fostering acceptance of the standards.
The IPC will interpret and maintain the integrity of GIPS, while also evolving GIPS into a ‘gold standard’ of the highest quality to be used around the world. Over the next several years, the IPC expects that the GIPS standards, the AIMR-PPS standards, and other regional standards will consolidate to form one global standard.
What does this mean for the AIMR-PPS standards? In early 1999, the requirements of the AIMR-PPS standards were significantly revised to bring them closer to GIPS. AIMR is now taking a strong lead in promoting the acceptance of GIPS in the US by redrafting the AIMR-PPS standards to incorporate both the format and content of GIPS.
To a large extent, GIPS and the AIMR-PPS standards are similar, with only slight differences in format and content. Very few substantive changes are necessary to bring the AIMR-PPS standards and GIPS together and AIMR will make a strong effort to minimise the differences between the two standards. The redraft of the AIMR-PPS standards will serve as an example of how countries or regions with existing standards can embrace one global standard, by incorporating GIPS as the core of the local standard and adopting additional provisions only when necessary to satisfy local regulation or to meet existing practice. The redrafted standards will be available for public comment later this year on the AIMR Web site (www.aimr.org).
GIPS support in the US is key to its acceptance around the world. Currently, there is a little confusion surrounding GIPS and its relationship with the longstanding AIMR-PPS standards the US. The AIMR-PPS implementation committee, a regional subcommittee of the IPC responsible for the AIMR-PPS standards, is currently looking into ways to reinforce the significance of GIPS to the investors and consultants in the US. Recognising that this will entail an evolutionary process, AIMR will work with IPC to develop a transparent transition plan to bring the AIMR-PPS and GIPS standards together.
With the two standards substantially the same, AIMR will encourage the industry to accept and embrace GIPS, just as it has done with the two standards in the past.
John C Stannard, is the chairman at
the Investment Performance Council,