Global Investment Performance Standards: After 25 Years, Room to Grow, and Gaps to Close

Over a quarter century, the Global Investment Performance Standards (GIPS) have settled in as a best-practice benchmark for investment firms’ performance calculations and presentations, yielding benefits in transparency and regulatory reporting.

The standards have not been static, and neither has the investment management industry. The CFA Institute’s most recent GIPS revision, in 2020, was in part aimed at attracting more small and alternative firms. There has been some success in, for example, the credit and private equity segments, according to advisors who support firms’ compliance efforts. But they see room for more participation.

Professional services firms including Deloitte and PwC have GIPS practices that help smooth the way to compliance.

Governance, risk and compliance consulting firm ACA Group’s Managed Performance Services offering enables investment firms to outsource some or all aspects of their performance measurement and reporting. It comes at a time of increasing marketplace and regulatory complexity, and amid the “constant challenge” of recruiting and retaining in-house talent, ACA global advisory leader Carlo di Florio said in the company’s June announcement.

Julia Reyes, partner, ACA Performance Services, says it has observed more alternative asset management firms, particularly credit managers, interested in GIPS compliance since 2020. She notes that 2021 guidance from the FINRA self-regulatory organization supporting GIPS-consistent calculations, along with more general calls for transparency, are factors in GIPS’s favor.

Where Pressure Is Lacking

Many firms that could become GIPS-compliant still are not, according to Sean Gilligan, founder and managing partner of Longs Peak Advisory Services. He estimates that about 1,600 firms globally were compliant before the 2020 revision, and 200 more have become compliant since.

Sean Gilligan, Longs Peak Advisory Services

“It’s grown a bit, but not a ton,” says the veteran investment performance and GIPS compliance consultant. “There’s tons of room for growth in all the smaller firms and pooled-fund-focused firms out there,” both alternative and traditional. “It’s more just about communicating to them that there is value, and it’s not as difficult as they probably think that it is.”

Reyes at ACA considers alternative funds “a little slow” to adopt GIPS. They haven’t felt “deep pressures” from the investment markets to comply, essentially allowing them “to continue business as usual.”

“Gold Standard”

There is no lack of consensus on the value of GIPS compliance. Reyes calls it “the gold standard for how to calculate performance. You know that any firm saying it is GIPS-compliant is calculating performance in a certain way.

“The SEC [Securities and Exchange Commission] is looking for more transparency in how performance is being shown and disclosed,” Reyes adds. “So GIPS provides a nice framework for firms to get their house in order on the inside, and then to present performance with those disclosures consistently.”

The risk management benefits from GIPS adherence are indirect, stemming from what can be presented to prospective investors. Says Reyes: “Being able to communicate to investors and to firms that are doing diligence on them provides that extra level of comfort. Also, going the extra step and maybe getting a third party to do a verification for you provides that extra level of security” that vouches for compliance. “All of that allows them to have a more meaningful conversation with the potential investor [with] more transparency on the performance.”

Difficult Calculation

However, a literal cost-benefit analysis of GIPS compliance is difficult. A fund manager may have to face the fact that it lacks and would have to pay up for the necessary expertise and systems.

Julia Reyes, ACA Performance Services

“Once you understand what it will take, you can understand if you have the resources and expertise available to go ahead,” Reyes says. “But there’s no set calculator to help with that.”

These complications aside, GIPS compliance can make sense for a variety of funds and firms, Gilligan contends. “Whether it’s real estate, private equity or hedge funds, anyone should benefit from knowing that there’s some policies and procedures behind managing how the data is all consistently organized and calculated.”

In Gilligan’s view, compliance by itself does not bring a marketing benefit that some may be looking for. “It’s not just on the traditional side,” he states. “Now for private equity, real estate, every asset class, we want them to be GIPS compliant.”

The 2020 revision made compliance easier, Gilligan observes. Closed-end fund managers, for example, can present money-weighted returns, such as internal rate of return (IRR), instead of time-weighted, even if they are not invested in private equity. The previous, 2010 version of GIPS referred only to private equity, leaving firms managing vehicles structured like private equity confused about how to present returns.

Source: PwC

More Educated Managers

Firms do have to perform net-of-fee calculations, which show a fund’s returns after management expenses. ACA’s new service addresses this, Reyes says. “Net-of-fee calculations is a hot topic . . . and firms seem to really value someone coming in and helping with those calculations.”.

In Gilligan’s experience, managers of pooled funds assume GIPS compliance is “a big, expensive ordeal,” but their calculation methods are usually aligned with the standards. “If they’ve got a fund administrator, it’s an audited fund, most likely what they’re doing calculation-wise is fine,” Gilligan says. “So it’s actually an easier project. All we need is the policies and procedures to document what they’re already doing. And then just create the disclosure report to put it into the standard GIPS format.”

CFA Institute is “doing a good job” educating regulators and industry participants, Gilligan adds. Its 27th annual GIPS Standards Conference is scheduled for October 17-18 in Chicago. (The institute, then the Association for Investment Management and Research, produced a North American predecessor of GIPS in the 1980s. The current, globally accepted standards were developed starting in 1995, issued for public comment in 1998 and formally endorsed by the association’s board of governors in February 1999.)

Increasing the number of firms following GIPS “will come from more investors demanding [compliance by] the firms they invest with,” Gilligan says. “Getting the word out to investors beyond the large institutional investors that require GIPS compliance is not an easy task. But transparent and comparable investment performance benefits investors of all shapes and sizes, so I hope as an industry we can figure out how to speak to this audience to raise awareness of GIPS.”

In a September 25 web posting on GIPS in private markets, ACA said that it has seen more than 90 private market firms take steps to align their performance with the standards and/or adopt them at the firm level over the past two years. That is more than 10-fold the adoption rate in prior years.