After much anticipation from the investment management community, CFA Institute released the 2020 Global Investment Performance Standards (GIPS®) on June 28, 2019. The newest version represents the most significant changes since the 2010 edition of the GIPS standards went into effect on January 1, 2011.
The goal of the GIPS standards is universal adoption, acceptance, and support around the world. The recent changes attempt to accomplish this by allowing more applicability and flexibility for asset managers and asset owners alike. Some of the initial key takeaways are as follows:
To facilitate ease of use, the changes to the GIPS standards represent a consolidation of guidance that existed both within, and outside of the existing provisions. The layout was reformatted, making it easier for the reader to determine what sections are applicable to their firm.
Guidance specific to certain asset classes (e.g., real estate and private equity) has gone away and in its place is guidance based on the type of vehicle(s) being managed and marketed (segregated account, pooled fund, or asset owner), as well as the type of returns being presented (time weighted or money weighted).
Composites Vs. Pooled Funds
Composites are now only required to include actual, fee-paying, discretionary segregated accounts. Pooled funds are not required to be included in composites if the strategy is only offered through a pooled fund structure. This change effectively eliminates the need for firms to create composites to house single funds. The 2020 GIPS Standards have defined two types of pooled funds: Broadly Distributed Pooled Fund – a pooled fund that is regulated under a framework that would permit the general public to purchase or hold the pooled fund’s shares and is not exclusively offered in one-on-one presentations. Limited Distribution Pooled Fund – any pooled fund that is not a broad distribution pooled fund. The distinction is important because each type of fund has different reporting requirements.
Firms may calculate and present money-weighted returns when the manager controls external flows into a portfolio or pooled fund (along with some additional criteria). This allows managers of very illiquid products and/or closed-end funds to show a more meaningful performance number to prospective investors. If subscription lines of credit are used, managers must present money-weighted returns both with and without the subscription line of credit.
Compliant Presentation = GIPS Report
What was previously referred to as a compliant presentation, is now referred to as a GIPS Report. There are three different types of GIPS Reports, depending on what is being presented:
- GIPS Composite Report
- GIPS Pooled Fund Report (required for limited distribution pooled funds but recommended for broad distribution pooled funds)
- GIPS Asset Owner Report
Firms that are already GIPS compliant and include limited distribution pooled funds in composites will not be required to prepare a GIPS Pooled Fund Report. Those firms may continue to present composite performance to pooled fund prospective investors.
There is now a requirement for firms to update the GIPS Report with data through the most recent annual period end within 12 months. For example, any GIPS Reports distributed beginning January 1, 2022 must contain required annual data through December 31, 2020.
Total Firm Assets
Firms are required to include discretionary and non-discretionary assets managed by the firm in total firm assets. Non-managed assets such as advisory-only and uncalled committed capital are not permitted to be included in total firm assets. However, the 2020 GIPS Standards allow firms to present firm-wide advisory-only and/or uncalled committed capital either as a separate value, or combined with total firm assets, as long as the total firm assets are also shown separately. For overlay strategy composites, firms may choose to present total firm assets or firm overlay exposure.
Estimated Transaction Costs
The GIPS standards require returns to reflect the deduction of transaction costs. In instances where transaction costs are unknown, firms are allowed to apply estimated transaction costs to calculate returns that are net of transaction costs. Moving forward, firms will be required to disclose the use of estimated transaction costs, including how they were determined and the amount.
Investment Track Record Portability
Linking a performance track record is now optional for firms. There is also no limit on when firms may port history from a prior firm or affiliation. If it takes three years to obtain records to support prior performance, the firm may port it at that time. Additionally, when a firm acquires a non-compliant entity, the assets of that firm must meet all the requirements of the GIPS standards within one year of the acquisition date, on a prospective basis. The acquiring firm is not required to bring historical data into compliance.
Carve-Outs with Allocated Cash
The GIPS standards will once again allow firms to present segment performance by creating carve-outs with allocated cash. This practice was previously allowed but prohibited beginning January 1, 2010. While the preference is still for these portfolios to be managed separately with their own cash, firms will be allowed to allocate cash using a consistent methodology to calculate a return for the strategy. Once a firm manages a stand-alone portfolio in that strategy, the firm must create a composite for those stand-alone portfolios and performance and assets of the stand-alone portfolio composite must be included when presenting carve-out performance.
Multi-Asset Class Strategies
The 2020 GIPS Standards offer much needed flexibility to firms that create custom multi-asset class portfolios based on individual strategies, sometimes referred to as “building blocks.” Firms are no longer required to include the total account in a composite as long as each of the “building blocks” that make up the total portfolio are included in a composite.
Real estate investments in an open-end fund will be required to have an external valuation at least once every 12 months. For all other real estate investments, an external valuation is required at least every 12 months or must be subject to an annual financial statement audit. If the client opts out of annual valuation, the fund must be valued at least once every 36 months, or more frequently as directed by the client agreement. It is recommended that other private market investments such as private equity and other similar illiquid investments get external valuations annually.
GIPS Standards Advertising Guidelines
The optional GIPS Standards Advertising Guidelines have been significantly expanded. Similar to GIPS Reports, the required disclosures are dependent on whether the firm is advertising the performance of a composite, limited distribution pooled fund, or broad distribution pooled fund. This will primarily give managers of broad distributed pooled funds the ability to leverage their claim of GIPS compliance in the public areas of their marketing initiatives.
Asset owners now have their very own set of provisions that are separate from the 2020 GIPS Standards for Firms. Although similar in nature, the 2020 GIPS Standards for Asset Owners are tailored to the unique structure and relationship with the end user that asset owners are faced with.
The effective date of the 2020 GIPS Standards is January 1, 2020. This means that all input data must comply with the 2020 GIPS Standards beginning January 1, 2020. Any GIPS Reports that include performance on or after December 31, 2020 must be prepared in accordance with the 2020 GIPS Standards. Firms are encouraged to early adopt at any time but must comply with ALL provisions of the 2020 GIPS Standards. Firms will effectively “flip a switch” when choosing when to comply with the 2020 GIPS Standards.
Please join us on July 17 at 11:00 a.m. ET to get a jump start on how the 2020 GIPS Standards may impact your firm. During this complimentary webcast, ACA Performance Services’ Crista DesRochers and Gabe Glass will highlight the material changes to the GIPS standards, including how the final version compares to the 2020 GIPS Standards Exposure Draft. Register today.
About the Author
Crista DesRochers, CIPM is a Partner at ACA Performance Services, a division of ACA Compliance Group. She provides GIPS compliance consulting and verification services to investment managers in the U.S. and abroad. Crista is a member of the United States Investment Performance Committee and also volunteers with CFA Institute in support of the CIPM program. She is the author of the 2016 (rev. 2018) white paper “Common Practices of GIPS‐Compliant Firms.”