On August 30, 2018, the Chartered Financial Analyst (CFA) Institute issued GIPS 2020 — the latest evolution of the Global Investment Performance Standards (GIPS), which aim to deliver transparency and comparability within the investment industry.
The Exposure Draft released provides much needed clarification on GIPS Standards but also paves the way to promote greater acceptance among various parties in the investment industry. Despite the CFA Institute issuing numerous guidance statements since GIPS 2010, there were enough notable current and future changes to evolve into a comprehensive proposal.
The most notable changes GIPS 2020 addresses, should the Exposure Draft be adopted, are summarized below:
Distinguishes between segregated accounts and pooled funds for composite creation and inclusion purposes. Pooled funds, where the strategy is not offered to prospective clients, would not be required to be included in its own composite, nor in a composite with other segregated accounts where a reason for exclusion is applicable.
Provides further clarification on the previously issued Guidance Statement on Broadly Distributed Pooled Funds, differentiating between distribution requirements for limited distribution pooled funds and broad distribution pooled funds. Limited distribution pooled funds would require the preparation and presentation of a GIPS Pooled Fund Report to prospective investors, whereas other flexible approaches could be applied for a broadly distributed pooled fund.
Promotes flexibility for firms to select the return type presented for various composites or pooled funds, when specific criteria is met. Additional guidance is clarified relating to return type and the required valuation frequency.
Offers the ability to estimate transaction costs (currently known as trading expenses) when actual transaction costs are not known.
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.
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 — and further clarifies the frequency at which such reports should be updated.
Expands on other key technical concepts specific to asset owners, and reformats the current standards to segregate sections specific to firms, asset owners and advertising guidelines.
In addition, the CFA Institute provides in the Exposure Draft an update on the incorporation of current guidance statements in progress as well as changes to verification procedures that will be forthcoming.
The public comment period for this Exposure Draft will remain open until December 31, 2018, with an intended adoption date of mid-2019 and an effective date of January 1, 2020. Firms would be required to prepare their reports in accordance with the GIPS 2020 Standards for periods ending on or after December 31, 2020.
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