January 2015 Author:
Hope E. Celani, CIPM ContributingCIPC
Members:
Odrée Ducharme, CFA Jenny Tsouvalis GIPS®forAssetOwners
The Global Investment Performance Standards (GIPS®) are a voluntary set of rules and guidelines sponsored by the CFA Institute, designed to promote fair, consistent and transparent investment performance calculation and presentations. On September 16, 2014, the GIPS Executive Committee issued the "Guidance Statement on the Application of the GIPS Standards to Asset Owners" which is intended to help Asset Owners to interpret and adhere to GIPS®. This guidance is in effect as of January 1, 2015. The announcement and guidance statement are available on the CFA Institute Global Investment Performance Standards website: http://www.gipsstandards.org/news/Pages/detail.aspx?ID=46. As with any guidance statement, the intention of the document is to help Asset Owners interpret and apply the GIPS Standards to their specific domain. The 2010 edition of the GIPS Standard are also available via this website: http://www.gipsstandards.org/standards/current/Pages/index.aspx What are the tangible benefits of GIPS compliance for Asset Owners? Adherence to GIPS® is a voluntary commitment that demonstrates to relevant parties a number of assurances related to performance calculation, valuation and presentation practices, based on the principles of fair representation and full disclosure. The establishment of industry standards helps to create meaningful, comparable performance results between Asset Owners. Further, the adoption of such standards demonstrates a commitment to an asset owner’s fiduciary obligations. Most important is the creation of in‐depth policies and procedures governing quality control, error correction, valuation principles, performance methodologies and calculations, and reporting. For Asset Owners undergoing verification, there is the added benefit of a third party review of such policies and procedures. 1 | P a g e January 2015 What do Asset Owners need to know? For Asset Owners who wish to adhere to GIPS®, they must comply with all existing guidance and requirements of GIPS®. The following provides highlights from the Guidance Statement on the Application of the GIPS Standards to Asset Owners and the GIPS Standards. The process begins by defining their firm. As noted in the guidance statement; A firm claiming compliance with the GIPS standards must be defined as an investment firm, subsidiary, or division held out to clients or prospective clients as a distinct business entity. The asset owner must have discretion over assets to comply with GIPS®. This means they must either internally manage assets or have the ability to hire or fire external investment managers. Other requirements for Asset Owners include documenting policies and procedures used in establishing and maintaining GIPS® compliance, establishing an error correction policy, and adhering to the GIPS valuation principles. Ultimately, Asset Owners bear the responsibility to certify their claim of compliance and must ensure that the records and information provided meet GIPS requirements. As per GIPS, a composite is an aggregation of one or more portfolios managed according to a similar investment mandate, objective, or strategy. As clarified in the guidance statement, for most Asset Owners, a single total plan composite will meet the need of representing their firm’s investment mandate. Unless an Asset Owner intends to create asset class composites, this largely assumes the investment mandate will be represented by a total plan composite and a corresponding policy benchmark. However, if an Asset Owner manages multiple separate total funds, assuming the investment mandates vary, they will need to maintain a composite for each one. As noted in the guidance statement, all key composite features of the composites investment mandate, objective and strategy, must also be disclosed in the composite description. Other disclosures include the total fund benchmark, typically defined by a blend of asset class benchmarks based on the policy weights of the respective asset classes, and any significant changes to the benchmark as well as the rationale for the change. It is recommended that Asset Owners disclose the percentage of externally managed assets for the most recent annual period. For most, if not all Asset Owners, this information is well documented and frequently reviewed so these disclosures mirror existing practices. The plan sponsor must report a net of fee, time‐weighted return (TWR). If applicable to meet other regulatory requirements, it is also recommended to present a net‐of‐fee, money‐weighted return (MWR). Unlike investment managers who comply with GIPS ®, the required net‐of‐fee disclosure includes investment manager fees as well as all other investment management costs including but not limited to the following: a pro‐rata share of overhead and other related costs and fees, including data valuation fees, investment research services, custodian fees, pro‐rata share of overhead such as building and utilities, allocation of 2 | P a g e January 2015 non‐investment department expenses such as human resources, communications, and technology, and performance measurement and compliance services. A compliant presentation will also disclose a fee schedule which includes all appropriate internal and external fees applied to the total plan. Effective January 1, 2015, all firms claiming compliance with GIPS® will also need to notify the CFA Institute. Firms claiming compliance are required to supply the following information: name of firm, address and contact information and verification status. The CIPC will provide further insight on this topic in 2015. If you are interested in posting a question to be addressed in future articles, please direct them to info@cipc.cfasociety.org. 3 | P a g e