Learning Module 4
Introduction to the Global Investment Performance Standards (GIPS)

The problem GIPS solves — before a common standard existed, firms used misleading practices that made performance comparisons unreliable across managers.

Representative accounts — selecting a single top-performing portfolio to represent a firm's overall results for a mandate.

Survivorship bias — presenting an "average" performance history that excludes terminated, poorly-performing portfolios.

Varying time periods — cherry-picking a favorable measurement window during which the strategy outperformed, making cross-firm comparison difficult.

GIPS mission — promote ethics and integrity and instill trust through universal demand for compliance by asset owners, adoption by asset managers, and regulator support — for the ultimate benefit of the global investment community.

GIPS objectives — promote investor interests and confidence; ensure accurate and consistent data; achieve worldwide acceptance of one performance standard; promote fair, global competition among firms; and promote industry self-regulation globally.

Who can claim compliance — only a firm (or asset owner) that manages actual assets may claim GIPS compliance. Consultants cannot claim compliance unless they manage the assets in question (though they may endorse GIPS or require their managers to comply). Software/software vendors can never be "GIPS compliant," even if the software helps calculate performance consistently with GIPS.

Asset owners — may comply like firms if they compete for business; if they don't compete for business but report to an oversight body, they may instead follow the GIPS Standards for Asset Owners.

All-or-nothing compliance — compliance is a firm-wide process, not something achieved product-by-product. A firm has exactly two options: (1) fully comply with all GIPS requirements and claim compliance via the GIPS Compliance Statement, or (2) not comply and make no reference to GIPS at all. There is no partial/selective compliance.

Voluntary, not legally mandated — GIPS compliance is voluntary and is not typically required by law or regulators.

Who benefits — Firms gain credibility, can compete for business against other compliant firms globally, and may strengthen internal controls. Prospective clients/investors gain confidence and easier cross-firm comparability (though GIPS does not eliminate the need for independent due diligence). Asset owners and their oversight bodies get consistent reporting that aids investment decisions and performance evaluation.

The problem GIPS solves — before a common standard existed, firms used misleading practices that made performance comparisons unreliable across managers.

Representative accounts — selecting a single top-performing portfolio to represent a firm's overall results for a mandate.

Survivorship bias — presenting an "average" performance history that excludes terminated, poorly-performing portfolios.

Varying time periods — cherry-picking a favorable measurement window during which the strategy outperformed, making cross-firm comparison difficult.

GIPS mission — promote ethics and integrity and instill trust through universal demand for compliance by asset owners, adoption by asset managers, and regulator support — for the ultimate benefit of the global investment community.

GIPS objectives — promote investor interests and confidence; ensure accurate and consistent data; achieve worldwide acceptance of one performance standard; promote fair, global competition among firms; and promote industry self-regulation globally.

Who can claim compliance — only a firm (or asset owner) that manages actual assets may claim GIPS compliance. Consultants cannot claim compliance unless they manage the assets in question (though they may endorse GIPS or require their managers to comply). Software/software vendors can never be "GIPS compliant," even if the software helps calculate performance consistently with GIPS.

Asset owners — may comply like firms if they compete for business; if they don't compete for business but report to an oversight body, they may instead follow the GIPS Standards for Asset Owners.

All-or-nothing compliance — compliance is a firm-wide process, not something achieved product-by-product. A firm has exactly two options: (1) fully comply with all GIPS requirements and claim compliance via the GIPS Compliance Statement, or (2) not comply and make no reference to GIPS at all. There is no partial/selective compliance.

Voluntary, not legally mandated — GIPS compliance is voluntary and is not typically required by law or regulators.

Who benefits — Firms gain credibility, can compete for business against other compliant firms globally, and may strengthen internal controls. Prospective clients/investors gain confidence and easier cross-firm comparability (though GIPS does not eliminate the need for independent due diligence). Asset owners and their oversight bodies get consistent reporting that aids investment decisions and performance evaluation.

Definition — a composite is an aggregation of one or more portfolios managed according to a similar investment mandate, objective, or strategy.

Purpose — composites exist specifically to prevent cherry-picking: a firm cannot showcase only its best-performing accounts for a given strategy.

What must be included — a composite must include all actual, fee-paying, discretionary portfolios managed in accordance with that mandate/objective/strategy — both currently and historically (including terminated accounts during the period they were managed that way).

Ex ante, not ex post, selection — which portfolios belong in a composite must be determined by pre-established criteria set in advance, not selected after the fact based on which performed best.

Non-discretionary accounts excluded — only discretionary, fee-paying portfolios go into composites; portfolios that are non-discretionary (see Section 4) must not be included.

Core principles — properly defining the firm; providing GIPS Reports to all prospective clients and certain pooled fund prospective investors; adhering to applicable laws and regulations; and ensuring presented information is not false or misleading.

Definition of the firm — the foundation for firm-wide compliance; it establishes the boundaries used to determine total firm assets. GIPS recommends firms adopt the broadest, most meaningful definition of the firm — including all geographic offices operating under the same brand name, regardless of the legal name of the individual investment management entity.

Definition of discretion — establishes the criteria for judging which portfolios must be included in a composite, based on the firm's actual ability to implement its intended strategy for that portfolio.

When a portfolio becomes non-discretionary — if documented client-imposed restrictions interfere with implementing the strategy to such an extent that the portfolio no longer represents that strategy, the firm may classify it as non-discretionary — and it must then be excluded from the firm's composites.

Self-regulation first — firms that claim GIPS compliance are responsible for that claim and for maintaining it; compliance itself is self-regulated, not automatically policed by a third party.

Verification is voluntary — once a firm claims compliance, it may voluntarily hire an independent third party (a verifier) to perform verification, increasing confidence in the compliance claim and potentially improving the firm's own performance-measurement knowledge and process consistency.

What verification actually tests — verification is performed on a firm-wide basis, testing whether the firm's policies and procedures for composite/pooled fund maintenance and for calculating, presenting, and distributing performance have been (1) designed in compliance with GIPS and (2) implemented firm-wide.

What verification does NOT do — it is not performed on specific composites or pooled funds, and it does not ensure the accuracy of any specific performance report or presentation.

Independence requirement — verification must be performed by an independent third party; a firm cannot verify itself (and an internal compliance department does not satisfy the requirement).

Benefits of verification — added credibility for the compliance claim, greater assurance for existing/prospective clients and investors, potential process improvements, and marketing advantages.