Level I - Ethical and Professional Standards

Introduction to the Global Investment

Performance Standards (GIPS)

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Reproduced and republished with permission from CFA Institute. All rights reserved.

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

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 Contents

I. Why Were the GIPS Standards Created?

I. Who Can Claim Compliance?
II. Who Benefits from Compliance?
II. Composites
III. Fundamentals of Compliance
IV. Verification

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 I. Why Were the GIPS Standards Created?
The GIPS standards:

• are a practitioner-driven set of ethical principles that establish a standardized, industry-wide approach for
investment firms to follow in calculating and presenting their historical investment results to prospective clients

• ensure fair representation and full disclosure of investment performance

• lead investment management firms to avoid misrepresentations of performance and to communicate all relevant
information that prospective clients should know in order to evaluate past results

• GIPS standards were created to make it easier to compare different investment management firms
• Without a standard, different firms would select the method which would make them look good
• Common misleading practices:
 Representative accounts
 Survivorship bias
 Varying time periods

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 Objectives of the GIPS standards

• Promote investor interests and instill investor confidence.

• Ensure accurate and consistent data.
• Obtain worldwide acceptance of a single standard for calculating and presenting
performance.
• Promote fair, global competition among investment firms.
• Promote industry self-regulation on a global basis.

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 I.I Who Can Claim Compliance?
Who can claim compliance
• Firms that actually manage assets can claim compliance
• Consultants that actually manage assets can claim compliance
• Asset owners can claim compliance in the same way as firms if
they compete for business
• Asset owners who do not compete for business can choose to
comply with GIPS standards for asset owners
• Software firms cannot claim compliance

How to claim compliance

• Compliance is a firm-wide process that cannot be achieved on a
single product or composite.
• Compliance is ‘all or none’

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 I.II Who Benefits from Compliance?
Asset management firms
• Assurance for prospective clients
• Participation in competitive bids
• Strengthening of internal controls

Investors (prospective client)

• Confidence in the integrity of performance presentations of a GIPS-compliant firm
• Compare performance presentation from different investment management firms

Asset owners
• Performance information to oversight bodies
• Evaluate performance of funds under management
• If external managers are also being used it helpful if the asset owner and external mangers use the
same performance reporting standards

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 GIPS® Standards for Firms
https://www.cfainstitute.org/en/ethics-standards/codes/gips-standards/firms

“Please read the Preface and the Introduction to the Global Investment
Performance
Standards for Firms for additional insight into the history, purpose, and key
concepts
of the GIPS standards.”

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 Key concepts of the GIPS standards that apply to firms
• The GIPS standards are ethical standards for investment performance presentation to ensure
fair representation and full disclosure of investment performance.
• Meeting the objectives of fair representation and full disclosure is likely to require more than
simply adhering to the minimum requirements of the GIPS standards. Firms should also
adhere to the recommendations to achieve best practice in the calculation and presentation
of performance.
• Firms must comply with all applicable requirements of the GIPS standards, including any
Guidance Statements, interpretations, and Questions & Answers (Q&As) published by CFA
Institute and the GIPS standards governing bodies.
• The GIPS standards do not address every aspect of performance measurement and will
continue to evolve over time to address additional areas of investment performance.
• The GIPS standards require firms to create and maintain composites for all strategies for which
the firm manages segregated accounts or markets to segregated accounts.
• The GIPS standards rely on the integrity of input data, the quality of which is critical to
creating accurate performance presentations. The underlying valuations of portfolio holdings
drive performance. It is essential for these and other inputs to be accurate. The GIPS
standards require firms to adhere to certain calculation methodologies to allow for
comparability across firms.

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 II. Composites
• A composite is an aggregation of one or more portfolios managed
according to a similar investment mandate, objective, or strategy.

• Composites are designed to prevent firms from cherry-picking.

• A composite must include all actual, fee-paying, discretionary portfolios

managed in accordance with the same investment mandate, objective, or
strategy.

• The determination of which portfolios to include in the composite should

be done according to pre-established criteria (i.e., on an ex-ante basis), not
after the fact.

• A claim of compliance requires that all fee-paying discretionary accounts

managed by the firm be included in at least one composite.

Please read Section 3.A. of the Global Investment

Performance Standards for Firms on composites.

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 III. Fundamentals of Compliance
Definition of the firm: adopt the broadest, most meaningful definition of the firm. The
scope of this definition should include all geographical (country, regional, etc.) offices
operating under the same brand name, regardless of the actual name of the individual
investment management company.

Definition of discretion: establish criteria to judge which portfolios must be included in a

composite and is based on the firm’s ability to implement its investment strategies.
If client-imposed restrictions interfere with the implementation of intended strategy 
Portfolio is non-discretionary and must not be included in a firm’s composite.

Section 1 of the 2020 GIPS Standards for Firms addresses the fundamentals of compliance in more
detail.

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And a lot more…

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 IV. Verification
• Firms that claim compliance with the GIPS standards are responsible for their claim of compliance
and for maintaining that compliance.

• Once a firm claims compliance with the Standards, they may voluntarily hire an independent third
party to perform a verification.

• Verification provides assurance on whether the firm’s policies and procedures related to composite
and pooled fund maintenance, as well as the calculation, presentation, and distribution of
performance, have been designed in compliance with the GIPS standards and have been
implemented on a firm-wide basis.

• Verification is performed with respect to an entire firm, not on specific composites.

• Verification must be performed by an independent third party. A firm cannot perform its own
verification.

• Third-party verification brings additional credibility to a firm’s claim of compliance.

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 Summary
• Why GIPS standards were created
• Parties that GIPS standards apply to
• Beneficiaries of GIPS standards
• Purpose of composites
• Fundamentals of compliance
 Definition of firm
 Definition of discretion
• Independent verification

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