Global investment management firms have had long-standing challenges in complying with the patchwork of laws, regulations and market customs in the places where they do business. The problem is that across global investment markets, a unified, consistent and cohesive regulatory guidance generally does not exist.

 But the financial industry has always been a community of problem solvers and the Global Investment Performance Standards (GIPS® standards) were ultimately developed to address the issue.

Quote 250x250Spearheaded by CFA Institute, the goal was to establish a set of voluntary requirements for consistent and transparent reporting that would create universal demand among asset owners, adoption by asset managers and support by regulators. These standards, which were first issued more than two decades ago, have been a tremendous success. Today, across 46 markets, more than 1,700 asset managers, including 24 of the largest 25, claim compliance1.

Nothing remains static in finance and to remain effective and relevant, the 2020 GIPS standards were developed to make improvements to the structure, relevance and simplicity of the guidelines, and to take advantage of the tremendous leaps in technology made in the intervening two decades. Using the accumulated feedback on the 2010 edition as a starting point, response from the industry was extensive, with over 5,400 comments received2. After filtering through and incorporating a great deal of input and commentary, a new body of standards was put into effect on January 1 of this year.

One of the priorities for the revamp was broadening the standards for greater relevance. For example, the old framework had certain deficiencies when it came to establishing comparability; that is, accurately comparing the performance of different asset managers with different cash flow experiences. To address this issue, the 2020 GIPS standards include a more flexible approach to money-weighted rate returns in performance calculations. Now firms can use that methodology if they chose to, provided that they meet certain criteria, including controlling external cash flows. This gives them the opportunity to claim compliance with the GIPS standards while still using the traditional measures of the alternative assets industry.

A related priority was restructuring the framework to simplify and streamline the 2020 GIPS standards requirements. This was done to improve upon the 2010 edition of the GIPS standards, which had grown in complexity over the years. The new GIPS standards were purposefully divided into three separate chapters, designed and written specifically for each of the three different types of users– asset managers, asset owners and verifiers. Additionally, to help on the efficiency front, the authors tried to remove unnecessary barriers to compliance and unnecessary disclosures, and generally simplify where possible.

Finally, the 2020 GIPS standards include several concepts where technology can play a larger role. Technology can be readily used to eliminate or minimize manual tasks and replace them with automated processes in situations including:

  • Allocating cash for carve-outs
  • Calculating different net returns for pooled funds
  • Applying model investment management fees
  • Calculating and applying estimated transaction costs
  • Automating money-weighted return (MWR) calculations

Always in flux and always looking for new solutions, today the capital markets seem to be changing more fundamentally and more rapidly than ever before. Given investor demands to drive rapid product innovation, CFA Institute and industry leaders and contributors realized that the time had come for the 2020 edition of the GIPS standards. The new framework has been advanced, adapted, expanded and enhanced. The 2020 edition of the GIPS standards ensures that this groundbreaking solution will maintain its practical investment industry relevance for years to come – all while still hewing to its core purpose: delivery of investment performance transparency and comparability.

1 https://www.cfainstitute.org/en/ethics-standards/codes/gips-standards

2 https://www.cfainstitute.org/advocacy/market-integrity-insights/2019/2020-gips-industry-feedback

Disclaimer: The information contained in this communication is for informational purposes only. Confluence/StatPro is not providing, legal, financial, accounting, compliance or other similar services or advice through this communication. Recipients of this communication are responsible for understanding the regulatory and legal requirements applicable to their business.

2020 GIPS Standards - Evolution, Adoption and Mid-Year Evaluation

Carl Bacon

Carl Bacon

Chief Advisor, Confluence & Chairman of the GIPS Executive Committee

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