Gearing up for GIPS 20/20

Blog entry

The Chartered Financial Analyst (CFA) Institute released the Global Investment Performance Standards (GIPS) 20/20 Exposure Draft for public comment late last month. The draft outlines significant changes to the current standards that could alter financial firms’ approaches to compliance. Comments on the draft must be made by December 31, 2018, with final adoption of the revised standards expected in mid-2019 and a targeted implementation date of January 1, 2020.

GIPS are a set of voluntary reporting guidelines based on the principles of full disclosure and fair representation of investment performance and have been widely adopted by asset managers keen to promote their compliant capabilities to clients.

The new and simplified GIPS 20/20 draft comprises numerous updates, including specific guidance for asset owners, and should go some way towards extending the reach of the GIPS initiative, which has already been adopted is already adopted by 1,538 firms representing more than 60% of global assets under management.

With the draft updates now publicly available, tech firms are looking towards upgrading solutions to help asset managers meet the new requirements. Most recently, BNY Mellon’s Eagle Investment Systems and ACA Compliance Group announced a collaboration to improve GIPS compliance and verification.

Mark Goodey, senior principal of investment analytics at Eagle, comments: “An asset manager’s compliance with GIPS standards has become a necessity in order to have credibility with investors. By streamlining the data collection process, we’re helping our clients provide the kind of transparency that is expected today.”

The GIPS 20/20 Exposure Draft provides specific sections for both firms and asset owners, with the goal of reducing complexity and eliminating the need to go back and forth between sections to determine which requirements apply. This builds on a growing trend of asset owners keen to leverage the standards to demonstrate the integrity of their own practices to other constituents.

Key changes to the draft include removal of the requirement to create a composite that includes only one or more pooled funds if the firm does not offer the strategy of the pooled fund as a composite strategy to segregated accounts. If a pooled fund strategy is the same as a composite strategy, the pooled fund must be included in the composite and a GIPS Composite Report must be presented to prospective composite clients.

Firms selling participation in a limited distribution pooled fund must prepare and present a GIPS Pooled Fund Report to all pooled fund prospective investors, reflecting only the specific pooled fund’s information. Broad distribution pooled funds do not require a report, although firms must offer either a Pooled Fund Report or a GIPS Advertisement if they wish to promote their GIPS compliance. This update could make GIPS compliance not only more attainable, but more attractive for fund managers.

GIPS 20/20 also relaxes the rules around money-weighted returns, removing the asset class distinction and offering more flexibility in terms of reporting categorisation. It also reverses the requirement imposed in 2010 to manage a carve-out with the firm’s own cash balance, instead allowing GIPS firms to allocate cash to carve-outs, in a move that could make GIPS compliance substantially more attractive to private equity and real estate fund managers. In terms of performance portability, the current one-year grace period to bring any non-compliant assets into compliance will only apply to performance at the new or acquiring firm, with no limit on when firms may port history from the prior firm or affiliation.