Global Investment Performance Standards (GIPS®) are ever-evolving to keep up with the fast-changing investment industry.
The success of the GIPS® standards is undeniable, with 40 countries now endorsing the standards. More than 1600 firms worldwide have notified the CFA institute of their claim of compliance. This includes 23 of the 25 largest asset management firms and 85 of the top 100 as compared to the Top 100 Global Asset Management Firms compiled by Cerulli Associates. These firms represent more than $48.8 trillion or 61% of all assets under management globally. Of the firms that submitted a claim of compliance during the 2016 notification period, 86% chose to undergo independent verification.
Despite this success, the GIPS® Executive Committee is not resting on its laurels, the mission of the GIPS® standards is for all asset managers to comply. To achieve this goal, the standards should be as simple as possible to remove the complexity and the perceived barriers to compliance. The standards need to ensure that there is relevance to all asset classes, all types of asset managers and importantly be relevant and useful to the end-user and all types of asset owners.
The GIPS® Executive Committee has initiated a process (GIPS® 20/20) where they are reviewing the entire body of the standards, incorporating existing guidance and Q&A’s, updating and streamlining the standards, removing unnecessary complexity, ensuring all asset types are addressed and making it relevant for all types of strategies and products.
Although composites are the foundation of the GIPS® standards, composites are however not ideal for all investment products. In particular, pooled or unitised funds and some private equity structures do not fit neatly into the current composite-oriented framework. To achieve broader adoption of standards, GIPS® 20/20 will address product-oriented firms and calculation differences (internal rate of return versus time-weighted rate of return and overlay strategies).
WHAT CHANGE DOES THE UPDATE IMPLY
The GIPS® 20/20 vision is focused on the relationship between asset managers and asset owners. Essentially there are three types of relationships the standards need to cater for:
- One–to–one: strategy focused (the current traditional composite type, client specific arrangement)
- One–to–many: product focused (pooled funds, standardized heavily regulated type arrangement)
- One–to–none: proprietary (large internally managed pension funds, Sovereign wealth funds)
The core of the GIPS® standards is comparability – a global passport for all asset managers across all asset types where there is a fair representation of performance. The challenge will be to maintain the cohesiveness and integrity of the standards whilst accommodating all asset classes and addressing all asset owner relationships. The GIPS® Executive Committee will issue a consultative document early this year setting out what they aim to achieve, and how they aim to achieve it within the tight timetable. To ensure this process is as successful as possible it is important all stakeholders, asset managers, asset owners, independent verifiers, administrators and other service providers, software providers and regulators respond.
WHAT WE NEED TO ASK OURSELVES
Is there any other type of relationship (perhaps none–to–none, or many–to–many) that the standards should address? Is such a major overhaul a good idea? What really needs to be changed? What issue really needs to be addressed?