After months of reviewing and considering thousands of comments on the exposure draft of the 2020 Global Investment Performance Standards (GIPS®) for firms, asset owners and verifiers, the final standards are here. The GIPS technical and executive committees released the final guidance on June 28, 2019, with an effective date of January 1, 2020. These standards will supersede those previously issued for 2010.
In general, GIPS are intended to promote fair representation and full disclosure of performance reporting and instill investor confidence in the investment community. The CFA Institute and other GIPS sponsors are the governing bodies behind the standards and play a crucial role in promoting the acceptance of these standards worldwide.
The exposure draft and final 2020 GIPS encompass many significant changes. In addition to expanding on many key technical concepts specific to firms and asset owners, it reformats the current standards to segregate sections specific to firms, asset owners and advertising guidelines.
The most notable changes are summarized below, including specific clarification on changes that occurred between the exposure draft and the finalized standards.
>> Read more on the exposure draft issued in 2018 in “GIPS 2020 Clarifies Standards, Makes Significant Changes”
1. Segregated Accounts vs. Pooled Funds
- Distinguishes these for composite creation and inclusion purposes, as well as for GIPS reporting
- Replaces what is now known as a Compliant Presentation with the option of three new reports — GIPS Composite Report, GIPS Pooled Fund Report and GIPS Asset Owner Report.
- Further clarifies the frequency at which such reports should be updated (12 months within each annual period-end determined to be the minimum).
2. Composite Creation, Maintenance and Related Disclosures
- Clarifies requirement for creating composites for firm’s strategies that are managed for or offered as a segregated account.
- Adds requirement to include composite inception date
- Provides clarification on client-directed changes from one composite to another, in instances where the portfolio manager has discretion, based on the client contract, to adjust the asset allocation.
3. Return Calculations
- Promotes flexibility for firms to select the return type (including the utilization of money-weighted returns) used for various composites or pooled funds, when one of four specific criteria are met and pending the firm has control over the timing of the external cash flows.
- Additional guidance is clarified relating to the use, calculation and the required valuation frequency, as well as the reporting of these alternative return types.
4. Transaction Costs
- Offers the ability to estimate transaction costs (currently known as trading expenses) when actual transaction costs are unknown.
- Although no specific method is required, additional guidance will be provided regarding possible methods.
- Allows firms to once again allocate cash to a carve-out — a portion of a portfolio that is by itself representative of a distinct investment strategy — instead of requiring cash to be managed separately in each portfolio.
- No specific method is required to be used when allocating cash; however, additional guidance will be provided regarding possible methods.
- Any carve-out included in a composite must be representative of a standalone portfolio managed or intended to be managed to that strategy.
- A firm must create carve-outs with allocated cash from all portfolios and portfolios segments within the firm managed to that strategy, and must include those carve-outs with the allocated cash in the composite.
- If the firm has standalone portfolios managed in the same strategy as the carve-outs, the firm must then create a separate composite for the standalone portfolios.
6. Net-of-Fees Calculation Methodology
- Modifies the calculation of net-of-fees returns. Previously, firms were able to calculate net returns based on the highest investment management fee; effective with the current standards, firms can determine the model fee that is used to calculate net returns, pending the net returns are lower when using the model fees than when using actual fees.
7. Pooled Funds Clarification
- Modifies the pooled funds performance calculation, presentations and disclosures. First and foremost, clarification was provided regarding the defining and classifying of Broadly Distributed Pools Fund (BDPF) versus Limited Distribution Pooled Fund (LDPF). BDPF is defined as a pooled fund regulated under a framework that would permit the general public to purchase or hold the pooled fund’s shares and is not exclusively offered in a one-on-one presentation. LDPF is any pooled fund that does not qualify as a BDPF.
- More specifically, requirements and recommendations were implemented surrounding the placement of pooled funds in composites; presentation and distribution requirements of GIPS Pooled Fund Reports, specific to both BDPF and LDBPF; calculation and presentation of performance returns for pooled funds; and other marketing and GIPS advertising guidelines with respect to pooled funds.
- An addition to the three existing portability requirements includes the requirement for there to be no break in performance returns.
- Should a break in performance returns occur between the prior firm and current firm, linking of returns would be disallowed.
- Added the option that firms are not necessarily required to port returns if all four criteria are met, when chosen.
9. Private Market Investments and Real Estate
- Removal of specific provisions relating to private equity and real estate; however, modifications were added regarding the frequency of valuation of underlying private investments, including real assets, private equity and other illiquid and non-publically traded investments.
- Additional clarification was provided specific to real estate investments, dependent on whether these were held in open-end funds or non-open-end funds.
It is important to note the above summary of changes are not all encompassing, as there are multiple other changes made in the 2020 GIPS that have not been highlighted here. Consult internally with your GIPS committee and evaluate the impact of these changes to your firm’s compliance efforts. The new standards are available for review at gipsstandards.org; however, additional clarification is forthcoming in the new GIPS handbook.
Firms reporting performance for periods ending on or after December 31, 2020, are required to prepare their respective reports in accordance with the newly issued standards; however, firms are able to early adopt if they so choose.
Please contact a member of your service team, or contact Lindsay Selick at firstname.lastname@example.org for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.