GIPS® Tackles Mutual Funds

January 29, 2016

The GIPS standards are based on the principle of consistency and comparability of investment performance results. To achieve this objective, the Standards create a framework that firms which choose to claim compliance must abide by. This framework includes prescribed methodologies that firms must use when calculating performance and a standardized list of disclosures that must be included in presentation materials. What the GIPS standards do not offer is guidance that can be universally applied to all scenarios.  Many complex issues have yet to be fully addressed within the scope of the GIPS standards and, at this point, remain open to interpretation until further guidance is provided.  One such issue relates to the application of the GIPS standards to broadly distributed pooled funds, such as mutual funds.  However, the wait for guidance in this area appears to be coming to a close.

 

Today the GIPS Technical Committee made available for public comment the  Exposure Draft of the Guidance Statement on Broadly Distributed Pooled Funds. As the name of the document implies, this proposed guidance is only applicable to “broadly distributed pooled funds,” which it outlines as encompassing “pooled unitized investment vehicles with broad distribution (i.e., where there is typically no or minimal contact between the firm managing the pooled fund and prospective pooled fund investors).” In the U.S. market, this primarily means mutual funds.

 

The proposed guidance statement makes it clear that firms are not required to provide or offer a GIPS-compliant presentation to mutual fund investors. However, guidance is being proposed that requires certain information that will need to be included in both the official pooled fund document (e.g., prospectus) and in fund-specific marketing material that the firm prepares. The required items include the following:

  • The description of the pooled fund’s investment mandate, objective, or strategy.
  • An indication of the pooled fund’s risk, either a qualitative narrative or a quantitative metric, as mandated by local regulators. If local regulators do not require a specific risk measure, the firm may choose the risk measure to present.
  • Pooled fund returns calculated according to the methodology and for the time periods required by local laws and regulations. If local regulators do not mandate a specific calculation methodology or frequency of returns, the guidance introduces options for what information must be presented.
  • Benchmark total returns for the same time periods as the pooled fund and a description of the benchmark.
  • The currency used to express performance.

 

In addition, two other items are recommended:

  • Disclosure of sales charges and loads and whether these fees have been deducted from performance.
  • The GIPS Pooled Fund Claim of Compliance, which would read as follows: “XYZ Firm, the firm managing this pooled fund, claims compliance with the Global Investment Performance Standards (GIPS®). For more information about the GIPS standards, please visit www.gipsstandards.org.”

 

Note that this claim of compliance statement is different from both the claim of compliance required to be disclosed in a compliant presentation and the claim of compliance specified in the GIPS Advertising Guidelines.

If this guidance is adopted, meeting these requirements would completely satisfy the fund manager’s obligations related to providing information that adheres to the GIPS standards. Specifically, the fund manager would not be required to provide a GIPS-compliant presentation to prospective pooled fund investors. Additionally, an offer of a compliant presentation in an official pooled fund document or fund-specific marketing materials would neither be required nor explicitly recommended.

In our view, this is truly a new and different approach for the GIPS standards to take, because for the first time the focus is on something other than a composite as the vehicle for communicating investment performance results. We also believe this approach aligns with the idea that it is the firm that complies with the GIPS standards, not a particular investment strategy or marketing piece. The GIPS standards are about presenting performance results in a transparent, ethical, and consistent manner, and that applies regardless of what type of product you are selling.

We are eager to see how the industry embraces this proposed guidance.  We urge you to review the full document yourself and submit your comments to standards@cfainstitute.org.

 

To view the proposed guidance, visit the GIPS website.