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:
- Representative Accounts
- Survivorship bias:
- 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.
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