Investment Company Notebook
An Overview of GIPS 2020
The release of the GIPS 2020 Standards is the most significant overhaul of the GIPS Standards in almost a decade. Below are significant provisions of the 2020 standards that could impact how firms calculate and present performance to their current and prospective clients.
The changes to the GIPS standards no longer require pooled funds to be classified within a composite. Accordingly, this will eliminate the prior practice of firms creating a composite specifically to include a single pooled fund. Firms can eliminate previously created composites intended only to include a single fund. However, if the strategy of a pooled fund meets the definition of an existing composite consisting of segregated accounts, the pooled fund needs to be classified within such a composite.
Further, pooled funds are classified as either “limited-distribution” (i.e. private funds) or “broadly-distributed” (i.e. registered mutual funds).
“GIPS Reports” replace “Compliant Presentations”
There are now three “GIPS Reports" that can be provided to users:
- GIPS Composite Report – consisting of either only segregated accounts or a combination of segregated accounts and pooled funds utilizing the same strategy
- GIPS Pooled Fund Report – required to be provided to prospective investors in limited-distribution pooled funds; recommended, but optional, for prospective broadly-distributed pooled fund investors
- GIPS Asset Owner Report – for asset owners who provide performance information to an oversight body
The new standards re-allow classification of “carve-outs” (i.e. a segmented portion of a portfolio) within a composite provided that cash balances in the portfolio are either allocated among the carve-out segments or accounted for separately. Classification of carve-outs within composites was prohibited beginning with the effective date of the 2010 standards, but was allowable prior to the 2010 standards.
The standards continue to require the presentation of time-weighted returns unless certain criteria are met permitting the presentation of money-weighted returns. Money-weighted returns, similar in concept to internal rate of return, can be presented for certain portfolios/funds if the firm has control over the timing of external cash flows and portfolios/funds have at least one of the following characteristics: 1) closed-end 2) fixed-life 3) fixed-commitment or 4) contain illiquid investments as part of the investment strategy.
Total Firm Assets
Total firm assets will continue to include all discretionary and non-discretionary assets managed by the firm and cannot include non-managed assets (i.e. advisory-only assets or committed capital). The GIPS Standards changes do, however, permit presentation of unmanaged assets in a GIPS Report provided that total firm assets, as defined above, are separately presented.
Total firm assets must now be presented at each annual period end in each GIPS Report. Under the prior standards, firms had the option to present either total firm assets or composite assets as a percentage of total firm assets on GIPS-compliant presentations.
Providing GIPS Reports
Firms must make every reasonable effort to provide a GIPS Report to all prospective clients when they initially become prospective clients. While the requirement to provide a GIPS Report (formerly known as a GIPS-compliant presentation) to all prospective clients is not new, the specific timing of when the GIPS Report is required to be provided has changed from “within the previous 12 months” under the 2010 standards to “when they initially become” prospective clients under the 2020 standards.
Further, independent verifiers are now required to perform procedures to determine the firm has made every reasonable effort to provide GIPS Reports to prospective clients.
Additional disclosures required by the 2020 standards include, but are not limited to, the following:
- Firms must now disclose both the composite creation date (when portfolios were first grouped together) and composite inception date (when the performance track-record of the composite began). While the inception and create dates can be the same in theory, they are not necessarily the same date. Under the prior standards, only disclosure of the composite creation date was required.
- Firms must disclose whether gross or net returns are used to calculate risk metrics (i.e. internal and external dispersion)
Firms must implement changes to the GIPS Standards in their systems effective January 1, 2020. However, GIPS Reports need to implement the 2020 standards changes beginning with the presentation of performance for periods ending on or after December 31, 2020, with early adoption permitted.
Bottom Line – For asset managers whose clients only consist of separately managed accounts, the 2020 GIPS Standards likely will not have a significant impact on the firm’s policies and procedures with respect to GIPS compliance. However, the 2020 GIPS Standards provide much-needed clarity for managers of pooled investment vehicles and tailored guidance for asset owners.