2020 GIPS® standards – Explanation of the Provisions

February 24, 2020 by  
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CFA Institute issued the 2020 edition of the GIPS® standards on June 30, 2019 and since has been working on drafting explanations for each provision. From this effort, Explanations of the Provisions in Sections 1, 2, and 3 of the GIPS® Standards for Firms were finalized and released earlier this month. The information included within these explanations is vast. GIPS®-compliant firms will need to consider all of the detail outlined in the explanations when adopting the 2020 GIPS® standards. Notably, there are several references to policies and procedures that must be in place and requirements that compliant firms must follow when distributing performance outside of the GIPS® Report.  Below are links to the PDF copies of the Explanation of the Provisions for the first three sections. It is expected that explanations on the remaining provisions will also be released soon.

As a reminder, firms will no longer be able to comply with the 2010 GIPS® standards and will instead need to adopt the 2020 GIPS® standards once performance for periods ending on or after December 31, 2020 is included in GIPS® Reports. Until the firm meets all applicable requirements of the 2020 edition on a firm-wide basis, it must continue to comply with the requirements of the 2010 edition. Adopting the 2020 GIPS® standards includes addressing all interpretative guidance issued by CFA Institute. We are working with firms to amend their policies and procedures in advance of the deadline, as it is acceptable to adopt the 2020 edition of the GIPS® standards early but only once a firm meets all applicable requirements.

Explanation of the Provisions

2020 GIPS® Standards – Use of Carve-Outs

August 1, 2019 by  
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Under the 2020 GIPS standards, firms are allowed to include carve-outs with allocated cash in composites. This is very positive news as firms often have a desire to demonstrate the performance of sub-strategies that are offered as standalone portfolios or components of multi-strategy portfolios. It is expected that a greater number of advisers, including private wealth managers and firms who manage private market investments, will find the options available to be more favorable than what was available under the 2010 GIPS standards.

A carve-out is a portion of a portfolio that is, by itself, representative of a distinct investment strategy. It may be used to create a track record from multi-strategy portfolios for a narrower mandate. It is common for a firm to manage several asset classes for a client and those assets will be held in one balanced/multiple asset class portfolio. Presenting the track record of these portfolios in one composite doesn’t always produce a meaningful representation of the firm’s track record since each portfolio often varies significantly.  Even when firms have created target asset allocation balanced/multiple asset class composites, the results of such composites do not always represent the strategy that is offered to a prospective client. This is because of the customization that is done for each portfolio to address the specific objectives and needs of the client. In these situations, the construction of carve-out composites is much simpler, more intuitive, and can provide more meaningful information to prospective clients than a composite that represents the combined performance of a mix of blended portfolios with diverse components and allocations.

Under the new guidance, firms will be able to present the performance of a specific asset class and create a meaningful track record that is representative of an investment strategy that the firm offers. Types of carve-outs other than those based strictly on asset class could include specific sectors, industries, market cap size ranges or style types. The 2020 edition of the GIPS standards provides guidance on calculation, presentation and reporting carve-out composite performance.  We are working with a number of clients to implement these requirements.

 

Firms Must Comply Before They Verify

March 20, 2019 by  
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 Complying with the Global Investment Performance Standards (GIPS®) is not a one‐time project that, once completed, can be checked off a firm’s to‐do list and set aside. GIPS compliance is an ongoing process that requires continuous maintenance and updates. Even if a firm receives a third‐party GIPS compliance verification, ongoing compliance cannot be ensured. GIPS verification is conducted at a particular point in time and is based on a review of a relatively small subset of the firm’s data. In order to effectively maintain compliance on an ongoing basis, firms should not rely entirely on their verification – they should also establish internal procedures and controls to monitor whether their GIPS compliance program is working as intended.

Implementing the below procedures will help ensure that your firm is meeting the ongoing obligations associated with claiming compliance with the GIPS standards:

  • Timely Processes: Actively maintain your composites – not just once a year or when preparing for verification. The more frequently you update and review your composites (ideally, on a monthly basis), the more accurate they will be and the easier the process will become.

 

  • Oversight: Implement a comprehensive review process to assess the accuracy of composite construction. This should involve testing the treatment of all new accounts, closed accounts, and accounts that experience strategy changes. There should also be a process for evaluating ongoing composite placement, such as reviewing performance outliers – composite members that perform in a manner that is materially different from the rest of the composite – to ensure that they continue to be included in appropriate composites.

 

  • GIPS Policies and Procedures: Review and update your GIPS policies and procedures manual on at least an annual basis. Ensure that your manual not only addresses what is done to maintain compliance (the policies) but also how compliance is maintained (the procedures) and that it keeps up with changes in your business.

 

  • Standard Operating Procedures: Separate from your GIPS policies and procedures manual, you should document standard operating procedures (SOPs) to outline step‐by‐step instructions for updating composites and presentation materials (including the different processes that are done monthly versus after year‐end). The SOPs should outline the systems used, sources for information, people involved and performance analysis that is conducted before performance is distributed.

 

  • Stay Current: Monitor for any changes to the GIPS standards that may impact your firm, as well as changes to the regulatory requirements applicable to performance  advertising. This could include signing up for email alerts, attending webinars or conferences, and having regular dialogue with your consultants and verifiers.

 

We can help you to create and maintain a GIPS compliance program. Click here to learn more about our Services.

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