The Basics around Global Investment Performance Standards (GIPS)

The Global Investment Performance Standards, or GIPS, are a set of voluntary ethical and professional standards for the evaluation and presentation of investment results. They seek to establish a minimum set of performance presentation standards that will facilitate the comparison of cross-manager performance. In that respect, they are laudable and quite important. The standards discussed for the exam became effective January 1, 2011.

 The basic objectives of GIPS are to

  • Establish global best practices for calculating and presenting performance
  • Facilitate accuracy and transparency
  • Facilitate comparison of historical performance
  • Encourage full disclosure and fair global competition
  • Encourage self-regulation

 The key characteristics of GIPS include

  • Voluntary, minimum standards
  • Mix of requirements and recommendations, must be adhered to with the goal of full disclosure and fair representation (which likely requires going beyond the minimum GIPS requirements)
  • Only investment firms and NOT individuals can claim compliance
  • Compliance must be on a firm-wide basis, NO partial compliance is allowed
  • Full disclosure is mandated (no cherry-picking performance)
  • Composites must include ALL fee-paying, discretionary portfolios
  • It covers all asset classes
  • Data integrity is paramount to the process
  • Provides standards where regulated industry standards are still lacking
  • The GIPS is constantly evolving

Why does the CFA Institute believes that there is even a need for global standards?

The primary purpose of GIPS is to avoid misrepresentation of performance and standardize reporting to facilitate global comparisons of investment results. Specifically, GIPS combats a few specific reporting issues including:

  1. Representative Accounts
  2. Survivorship bias: 
  3. Manipulating time periods to only show performance for strong periods
How does GIPS Solve these issues?

GIPS looks to address these problems by standardizing calculation methods. This helps a client understand and compare returns across managers and better understand exactly how a manager achieved his or her return. Think about it this way:

A 10% return achieved by betting on biotech stocks is not the same as a 10% return with a conservative basket of bonds and large cap Fortune 500 stocks. 

Studying for Level 3 and hating how many pages you have to get through? 

Check out our blog post: https://gostudy.io/blog/Avoid-Memorization-and-score-points-on-GIPS-for-CFA-L3 

Or sign up below to get immediate AND free access to our 10 page review of GIPS.