CFA Institute released the 2020 Global Investment Performance Standards with an effective date of January 1, 2020, replacing the existing GIPS 2010 standards.
The 2020 GIPS standards aim to consolidate various GIPS guidance issued in past, to better accommodate the needs of managers of pooled funds, alternative investments and high-net-worth clients, to better address applicability for asset owners, and to further improve GIPS reporting.
New structure
The 2020 GIPS standards introduce three separate frameworks for (1) Firms, (2) Asset Owners and (3) Verifiers, and enhance the performance reporting specifically for pooled funds and for presentation of money-weighted returns.
| Firms | Asset Owners | Verifiers |
General provisions: 1. Fundamentals of compliance |
General provisions: 21. Fundamentals of compliance |
- Verification - Performance examination |
Composite reports: 4. TWR report |
Asset owner reports: 24. Total fund and composite TWR report |
|
Pooled fund reports: 6. TWR report |
||
8. Advertising Guidelines: - Composite - Limited distribution pooled fund - Broad distribution pooled fund |
26. Advertising Guidelines |
|
| Glossary | Glossary | Glossary |
Key changes
The 2020 GIPS standards introduce tailored concepts to better reflect the peculiarities of segregated portfolios vs. pooled funds.
Firms need to consider what is being offered:
- Investment strategy offered as a segregated portfolio (or as both a segregated portfolio and a pooled fund)
- Participation in a specific limited distribution pooled fund
- Participation in a specific broad distribution pooled fund
- If firms sell participation in specific pooled funds, they must classify them either as BDPF or LDPF
- If a pooled fund is managed by the firm on behalf of a third-party fund management company (i.e. the firm is not responsible for the fund’s selling/distribution), the firm must consider such a fund a segregated portfolio and include it in a composite
Composite (grouping of portfolios with comparable investment strategy): Firm sells an investment strategy to a client (who may opt to invest either through a segregated portfolio or a pooled fund)
Broad distribution pooled fund (BDPF): Firm sells participation in a specific fund. Typically, no direct contact between the firm and the pooled fund investor. Regulated under a framework that would permit the general public to purchase or hold the pooled fund’s shares. Not exclusively offered in one-on-one presentations.
Limited distribution pooled fund (LDPF): Firm sells participation in a specific fund – any pooled fund that is not a BDPF
The 2020 GIPS standards expand the flexibility to use money-weighted returns:
Historically, firms were required to present time-weighted returns (TWR), except for specific cases of Private Equity and Real Estate
Now firms may choose to present MWR (e.g. 'Since Inception IRR' or 'Since Inception Modified Dietz') instead of TWR for the composite or pooled fund if:
- The firm has control over external cash flows, and
- The portfolio or the pooled fund has, at least one of the following characteristics:
- Closed-end
- Fixed life
- Fixed capital commitment
- Illiquid investments are a significant part of the investment strategy
GIPS reports that present MWR are required to:
- Include MWR for only one period – since inception annualised through the most recent annual period-end (as opposed to the annual returns for TWR)
- Include all other information (e.g. assets, committed capital, distributions and related multiples) only as of the most recent annual period-end
- Composites and pooled funds that use a subscription line of credit must present performance both with and without the subscription line of credit effect (unless the exemption criteria are met)
Depending on the nature of the investment portfolio being managed, the 2020 GIPS standards provide a larger number of options for performance reporting.
| Time-Weighted Return (TWR) | Money-Weighted Return (MWR) | |
| Composite | Composite TWR report | Composite MWR report |
| Limited distribution pooled fund (LDPF) | - Pooled fund TWR report - Optional: Composite TWR report* |
- Pooled fund MWR report - Optional: Composite MWR report* |
| Broad distribution pooled fund (BDPF) |
-No reporting -Optional: Advertising Guidelines -Optional: Pooled fund TWR report or composite report* |
- |
| Asset owner | - Total fund TWR report - Optional: Composite TWR report |
Optional: Composite MWR report |
* Composites and pooled funds may present either gross or net returns, or both
The new guidelines expand options for referencing a firm’s claim of compliance with the GIPS standards.
- Returns in a GIPS advertisement must be derived from the returns included in the corresponding GIPS report
- Advertisements with performance have a new option to present just one annualised return for the total period that includes all periods presented in the corresponding GIPS report
- A big change is the inclusion of the BDPF GIPS Advertising Guidelines. These replace the requirements previously included in the 'Guidance Statement on Broadly Distributed Pooled Funds':
- Firms have no requirement to present performance for an individual BDPF to prospective investors in BDPFs (e.g. firms may opt not to have any GIPS reporting for BDPFs)
- Firms may voluntarily choose to follow the GIPS Advertising Guidelines for a BDPF and make use of the existing fund marketing materials (e.g. fund factsheets)
- Firms may also voluntarily choose to prepare a GIPS pooled fund report for a BDPF
- Firms may also voluntarily choose to continue to keep a single-fund composite and to prepare a GIPS composite report for a BDPF
- Firms may choose to present either net-of-fees or gross-of-fees returns for BDPFs
The 2020 GIPS standards provide a dedicated framework for asset owners who manage their proprietary assets.
- Based on the GIPS guidance for firms, but tailored to asset owners and incorporate many of the concepts from the existing GIPS Asset Owner Guidance Statement.
- Guidance is specific to total funds and composites.
- A total fund is a pool of assets managed by an asset owner according to a specific investment strategy, which is typically composed of multiple asset classes. The total fund is typically composed of underlying portfolios.
- Total funds must present TWR and are recommended to include MWR, if MWR are helpful in understanding the performance of the total fund.
- Additional composites are asset-class composites:
- Asset owners may choose to report additional asset-class composites, but are not required to do so
- Additional composites may present TWR, MWR, or both
- There are no criteria for presenting MWR – the choice is left to the asset owner - Asset owners must make every reasonable effort to provide a GIPS asset owner report for total funds and any additional composites that have been created (if the asset owner also chooses to create a report for the additional composite) to those who have direct oversight responsibility for total fund assets and total asset owner assets.
- Asset owners must initially attain GIPS compliance for a minimum of 1 year (vs. firms: 5 years or since inception).
- Asset owners that compete for business must follow the GIPS Standards for Firms
Guidance that verifiers must follow when conducting verifications and performance examinations. In addition, verifiers may also follow further professional guidance.
- Replaces the existing Guidance Statements on Verification and Performance Examinations.
- Clarify verification procedures in relation to the 2020 GIPS standards. Generally do not increase the scope of verification, but reflect current appropriate verification testing practices.
- The verification report must opine that, for the period(s) for which the verification has been performed, the firm’s policies and procedures for complying with the GIPS standards related to composite and pooled fund maintenance as well as the calculation, presentation and distribution of performance have been, in all material respects:
- Designed in compliance with the GIPS standards; and
- Implemented on a firm-wide basis
- Verification does not provide assurance on the operating effectiveness of the firm’s controls or policies and procedures for complying with the GIPS standards.
- Verification does not provide assurance on any specific performance report (this is covered by performance examination).
- Verifiers must conduct their engagements in accordance with the 2020 GIPS Standards for Verifiers for periods for which the verification client claims compliance with the 2020 GIPS standards. A verifier may also follow the 2020 GIPS Standards for Verifiers for all periods for which the verification is performed, even for those periods for which the verification client follows a prior edition of the GIPS standards.
Need for action and how our team can support
- GIPS compliant firms should conduct a gap analysis in terms of the 2020 GIPS standards and identify necessary implementation measures that must be completed by the end of 2020
- Many new GIPS provisions are subject to interpretation that are only provided in the Explanations of the Provisions (released progressively during 2020)
- The specialised Investor Trust Services team of PwC Switzerland provides assurance to investment managers and asset owners with respect to:
- Navigating the complex 2020 GIPS framework and interpreting new guidance
- Gap analysis of the 2020 GIPS standards
- Assurance during the 2020 GIPS implementation phase
- Verification of compliance with the 2020 GIPS standards
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