Asset owners have always been able to claim compliance with the Global Investment Performance Standards (GIPS®) if they have discretion over their assets. Historically, however, the GIPS standards focused on firms that manage assets for clients and compete for business, making it challenging for asset owners to apply the existing guidance to their unique circumstances.
While the Guidance Statement on the Application of the GIPS Standards to Asset Owners (issued in 2014 and updated in 2017) provided asset owners with clarification for how to apply the GIPS standards to their organization, many asset owners found applying the provisions to their organizations challenging because the GIPS standards were not originally designed for asset owners that do not compete for business. Asset owners that compete for business must follow the GIPS Standards for Firms.
One of the key changes of the 2020 edition of the GIPS standards is that there are now separate provisions for asset owners, addressing their specific structure and circumstances. This stand-alone chapter for asset owners will help to better facilitate asset owners attaining and maintaining compliance.
The benefits for being GIPS compliant are compelling for Asset Owners. Complying demonstrates to members, oversight boards, legislative boards, and the general public that the asset owner supports an accepted set of best practices for calculating and presenting investment performance. In addition, it shows a commitment to follow best practices for valuing investments, creating comprehensive performance policies and procedures, and calculating and presenting investment performance that is consistent and transparent.
Fundamentals of Compliance
The first step for an asset owner attaining compliance is to determine the definition of the asset owner. That defined entity will be responsible for reporting presentations in compliance with the GIPS standards to its oversight body. The assets managed within the defined entity represent the total assets that must be considered when applying the GIPS standards.
The requirements for asset owners revolve around the concept of reporting total fund performance to oversight bodies. A total fund is defined as a pool of assets managed by an asset owner according to a specific investment mandate, which is typically composed of multiple asset classes. The total fund usually consists of underlying portfolios, each representing one of the strategies used to achieve the asset owner’s investment mandate.
Asset owners must initially attain compliance for a minimum of one year, or for the period since the asset owner inception, if the asset owner has existed for less than one year. Once an asset owner attains compliance, it must provide a GIPS Asset Owner Report for all total funds and any additional composites it has created to its oversight body at least once every 12 months.
A GIPS Asset Owner Report is a presentation for a total fund or composite that contains all the information required by the GIPS standards. Assuming an asset owner initially attains compliance for a one-year period, the GIPS Asset Owner Report must initially include one year of annual performance that is compliant with the GIPS standards. If the total fund or composite has been in existence less than one year, the asset owner must present performance since the inception of the total fund or composite. Asset owners must then build up to minimum of 10 years of GIPS-compliant performance. A GIPS Asset Owner Report must include only GIPS compliant performance. Asset owners may, however, present a non-GIPS compliant track record as long as the presentation is made outside of the GIPS Asset Owner Report.
Once an asset owner has determined the period for which it will attain compliance, it must then calculate performance that meets the requirements of the GIPS standards. While the GIPS standards do not specify exactly how returns must be calculated, they include minimum requirements for calculation methodologies; for example, all investments must be fair valued, interest income must be accrued, and total fund returns must be total returns. These requirements help to ensure the information presented to the oversight body meets industry best practice.
Total Fund and Composite Maintenance
Asset owners must identify all the total funds they manage. If the asset owner manages more than one total fund according to the same investment mandate, it may combine the total funds into a composite or choose to report them separately. Asset owners are required to:
- Present total fund performance, either individually or within a composite, to the oversight body, and
- Present time-weighted, total returns for total funds that are net of all fees and expenses.
A total fund is typically made up of multiple asset classes. Asset owners have the option to present individual asset class composite performance and present it in a GIPS Asset Owner Report. Unlike a total fund, asset class composites may present either time-weighted or money-weighted returns; doing so is optional.
GIPS Asset Owner Reports
A GIPS Asset Owner Report includes performance of the total fund or composite, as well as other numerical information. Some of these items include benchmark returns, total fund or composite assets as of each annual period end, and the three-year annualized ex-post standard deviation (using monthly returns) of the total fund or composite and the benchmark as of each annual period end.
A GIPS Asset Owner Report must also include a series of disclosures. A key disclosure is the claim of compliance, which includes whether the asset owner has been verified. Verification is a process by which an independent verifier conducts testing of an asset owner on an asset owner-wide basis, in accordance with the required verification procedures of the GIPS standards. Other required disclosures include a description of the total fund’s or composite’s mandate, and a description of the benchmark’s investments, structure, and characteristics. Disclosures allow asset owners to elaborate on the date provided in the presentation and give the reader the proper context in which to understand the performance.
GIPS Advertising Guidelines
With the GIPS Advertising Guidelines, asset owners have the ability to state their claim of compliance outside of a GIPS Asset Owner report to a wider audience, including beneficiaries or the general public. For example, some asset owners wish to include in their Comprehensive Annual Financial Report (CAFR) performance information prepared in accordance with the GIPS Advertising Guidelines, to inform readers that the asset owner has chosen to comply with the GIPS standards.
The 2020 edition of the GIPS standards has an effective date of January 1, 2020. This effective date applies to those asset owners that currently claim compliance with the 2010 edition of the GIPS standards. For these asset owners, GIPS Asset Owner Reports that include performance for periods ending on or after December 31, 2020 must be prepared in accordance with the 2020 edition of the GIPS standards. Asset owners may choose to early adopt the 2020 GIPS standards. If asset owners choose to early adopt, they must comply with all requirements of the 2020 edition of the GIPS standards.
How We Can Help
Asset owners must meet all the applicable requirements of the GIPS standards before claiming compliance. Creating strong policies and procedures around all aspects of GIPS compliance helps to ensure compliance is maintained and the performance information presented is accurate. Fairview Performance Services’ staff have been assisting organizations with all aspects of GIPS compliance for more than 20 years. We are uniquely qualified to assist asset owners looking to attain compliance with the GIPS standards.