Ensuring Fair Representation and Full Disclosure of Investment Performance
Before the GIPS standards, investment firms could present performance data in misleading ways, making it difficult for clients to compare managers. Common misleading practices included:
Showing results from a single top-performing portfolio as if it were representative of the firm's overall results.
Excluding poorly performing accounts from performance history, which artificially inflates the reported average return.
Presenting performance for a cherry-picked time period that shows the firm in the best possible light.
The GIPS standards were created to address these issues by establishing a consistent, standardized approach to performance reporting across the investment industry.
The GIPS standards are a set of voluntary, ethical principles for standardized, industry-wide performance presentation. Their goal is to ensure that investment performance is presented in a way that is fair, accurate, and comparable across different firms.
By adopting GIPS, firms give clients and prospects greater confidence in their reported performance, allowing for more reliable comparisons and more informed investment decisions.
GIPS standards are recognized and accepted worldwide, promoting consistency across international markets.
Ensures that performance presentations accurately reflect the firm's investment management capabilities.
Requires comprehensive disclosure of information necessary for investors to interpret performance results.
A cornerstone of the GIPS standards is the use of composites. A composite is an aggregation of one or more portfolios managed according to a similar investment strategy or objective.
Composites prevent firms from showing only their best-performing accounts and ensure that performance presentations represent the firm's ability to manage a particular strategy across all client portfolios.
To further enhance confidence, firms that claim compliance with the GIPS standards are encouraged to undergo verification. Verification is the review of a firm's performance measurement processes and procedures by an independent third party.
The verifier must attest that:
Once a firm has been verified, it can disclose this to clients and prospects using specific language, for example:
"[Insert name of firm] has been verified for the periods [insert dates] by [name of verifier]. A copy of the verification report is available upon request."
Verification provides additional credibility to a firm's GIPS compliance claim and demonstrates the firm's commitment to the highest standards of performance reporting.
Independent verification gives clients and prospects confidence that the firm's performance measurement processes meet GIPS requirements.