Question

Explain the role the Global Investment Performance Standards (GIPS) fulfill in investment management around the world. Discuss with specific example how they help investors, what impact they have on firms, and how this impacts the reporting of performance. Provide comprehensive answer.

Answer 1

Global Investment Performance Standards (GIPS) are the globally accepted ethical standards followed by investment managers to ensure full disclosure and fair and honest representation of their investment performance. They were formulated by the CFA Institute and are interpreted by GIPS executive committee. It is globally adopted in more than 46 markets and by over 1700 firms. The latest version of 2020 GIPS was released by CFA Institute in 2019, to improve upon the 2010 guidelines.

Role of GIPS

The role of formulating these standards was to promote ethical guidelines for investment management professionals and protect investor interests. The enforcement of these standards, though not compulsary, needs to be done on a firm wide basis.

How they help investors, firms and impacts performance

Investment management firms use these as guidelines to report their investment performance. Since these are widely accepted principles, they lend more credibility to such firms and investor interests are protected. Investment managers and asset owners are both required to be compliant, and now this has been extended to alternative investment managers as well. For an investor, it becomes easier to compare performance of firms which are GIPS complaint. Secondly, since it imposes consistency in calculations and performance presentation, it makes easier for investors to understand.

For a firm's perspective, GIPS ensures strong internal controls and internal processes. It provides investors with details related to performance data, fees, composite construction, returns dispersion and so on. This gives assurance to investors about the safety of their funds. In addition, GIPS standards requires firms to be verified, which means an independent assessment to be conducted by a third party. For instance, in case of an asset management firm, this third party will verify the firms composites, how is the firm ensuring its GIPS compliance, internal controls to check for compliance.

Reference:

CFA Institute website