Introduction to GIPS: Enhancing Investment Performance Presentation | CFA Level I Ethics

Welcome back as we get introduced to the Global Investment Performance Standards, abbreviated as GIPS (read gips). In this article, we’ll learn:

• Why GIPS was created and who it is meant for
• The objectives and key characteristics of GIPS
• A quick introduction to composites
• GIPS compliance verification requirements

Why GIPS is Necessary

While GIPS is a tool that you can use to help you and your firm comply with the standard, you are not obligated to comply with GIPS. It is just a recommendation.

So why is it necessary to have a common standard for performance presentation? Imagine an unsophisticated investor with a large sum of inheritance to invest. Several investment managers approach her and present their track record of past performance. Before the establishment of a common standard, it was close to impossible to compare the performance due to various ways investment firms can misrepresent their results, such as:

• Representative accounts
• Survivorship bias
• Varying time periods

GIPS is a set of ethical principles based on a standardized, industry-wide approach to measuring performance. When firms adopt the same ethical standards to present their performance, they avoid misrepresentations of performance and assure prospective clients that the historical “track record” they report is both complete and fairly presented.

Main Objectives of GIPS

The main objectives of GIPS are:

• To establish investment industry best practices for calculating and presenting investment performance that promote investor interests and instil investor confidence.
• To ensure consistent and accurate investment performance data in areas of reporting, records, marketing, and presentations.
• To promote worldwide acceptance of a single standard for the calculation and presentation of investment performance in a fair and comparable format with full disclosure.
• To promote fair, global competition among investment firms without creating barriers to entry.
• To promote global self-regulation.

Key Characteristics of GIPS

Some key characteristics of GIPS include:

• Compliance to GIPS must be on a firm-wide basis.
• The firm must be fully compliant to GIPS.
• Partial compliance is strictly not allowed.
• If local laws or regulations conflict with GIPS, firms are required to comply with the local laws and disclose the conflicts.
• Definition of a firm should reflect the distinct business entity that is held out to the investment public.

Introduction to Composites

A composite is a grouping of individual discretionary portfolios representing a similar investment strategy, objective, or mandate. Under GIPS, a composite must include all actual, fee-paying, current and past, discretionary portfolios managed in accordance with the same investment mandate, objective, or strategy.

GIPS Compliance Verification

Compliance with GIPS is purely voluntary and the responsibility of the firm to ensure and maintain the compliance. However, for better credibility, firms are encouraged to pursue independent verification of compliance by a third party. Do note that a firm cannot perform its own verification.

Verification must be performed with respect to an entire firm, not on specific composites. The verifier’s role is to attest that the firm has complied with all GIPS requirements for composite construction on a firm-wide basis, and the firm’s processes and procedures are established to present performance in accordance with GIPS requirements.

After a third-party has signed off on the verification, verified firms can include the relevant disclosure in their marketing materials.

And there you have it – our quick introduction to the Global Investment Performance Standards. Now you know the importance of GIPS in ensuring a fair and accurate investment performance presentation, leading to better decision-making for investors!