Investment managers and asset owners are preparing for the updated Global Investment Performance Standards (GIPS®). These are the voluntary (yet widely used) principles that guide how to calculate and present investment performance results. Since GIPS® launched in 2001, successive updates have built on the initial goal to create a fair, consistent and transparent framework for the measurement and presentation of a firm’s investment record.
GIPS® 2020 is the first major rewrite of the standards since 2010. It contains several significant updates; some of these key changes are outlined below.
- Gone is the “one size fits all” approach, which was focused on Asset Managers. The new approach presents a trifurcation of the standards, with separate sections for Firms, Asset Owners and Verifiers. The segmentation provides more tailored guidance specific to Asset Owners (non-competitive end investors, such as Pension Funds) and Verifiers.
- Changes to the treatment of both “broad” and “limited” distribution pooled funds could encourage non-compliant firms to adopt the standards. Managers may continue to include the “broad” version in composites (where they offer the same strategy as a segregated mandate) but will no longer need to maintain many single-fund composites for strategies that are purely aimed at the retail investor.
- Estimated transaction costs (currently known as trading expenses) are allowed, when actual transaction costs are unknown; it is hoped that a defined methodology for a consistent application by all firms will be included in the upcoming GIPS® Handbook.
- Expanding and clarifying the use and presentation of money-weighted returns, along with tighter control on when a firm must include and report on subscription lines of credit are changes that have been broadly supported.
- Overlay strategies and the ability to capture the correct exposure, along with a wide range of new disclosures, are covered by the revised standards.
- Allowing for carve-out portfolios without specific cash allocations is one area that stirs much debate. This type of carve-out, where a theoretical cash allocation is applied using a rules-based approach, can now be a member of a composite. While it may work in some simplistic examples (e.g. the traditional “balanced” portfolio), how it will be applied to more complex multi-asset strategies raises unanswered questions. Cash that may be held in multiple currencies, exposures that could be hedged across asset classes, and reallocation scenarios are some instances that will need evaluation as these strategies evolve over time.
These highlights don’t represent an exhaustive list of all the updates, but are key ones of import. The new standards go into effect on January 1, 2020. Users who want to claim compliance must prepare their reports according to GIPS® 2020 for performance periods ending on or after December 31, 2020.
While the new standards may necessitate additional calculations, much of the impact involves reporting. The ability to create and maintain a wide range of new reports in a highly flexible, customizable and automated manner will be a key differentiator.
At SS&C, we are adding functionality to enhance the flexible framework that manages reporting processes in Sylvan™, our market-leading performance measurement, attribution and composite management platform. We plan to add the new GIPS® Reports to the extensive list of current options in Sylvan early in 2020 to support any new or existing clients that wish to be early adopters of the new standards.
In the meantime, learn more about our automated and fully integrated Sylvan solution in this Sylvan Overview video or other materials, and stay tuned for more GIPS® 2020-supporting product developments.
