The GIPS standards benefit two main groups: investment management firms and prospective clients.
■ By choosing to comply with the GIPS standards, investment management firms assure prospective clients that the historical “track record” they report is both complete and fairly presented. Compliance enables the GIPS- compliant firm to participate in competitive bids against other compliant firms throughout the world. Achieving and maintaining compliance may also strengthen the firm’s internal controls over performance- related processes and procedures.
■ Investors have a greater level of confidence in the integrity of performance presentations
of a GIPS- compliant firm and can more easily compare performance presentations from different investment management firms. While the GIPS standards certainly do not eliminate the need for in- depth due diligence on the
part of the investor, compliance with the Standards enhances the credibility of investment management firms that have chosen to undertake this responsibility.
COMPOSITES
One of the key concepts of the Standards is the required use of composites. A composite is an aggregation of one or more portfolios managed according to a similar investment mandate, objective, or strategy. A composite must include all actual, feepaying, discretionary portfolios managed in accordance with the same investment
mandate, objective, or strategy. For example, if a GIPS- compliant firm presents its track record for a Global Equity Composite (the Composite), the Composite must include all portfolios that are managed, or have historically been managed, in the firm’s Global Equity strategy. The firm may not subjectively select which Global Equity
portfolios will be included in or excluded from the calculation and presentation of the Global Equity Composite. The determination of which portfolios to include in the Composite should be done according to pre- established criteria (i.e., on an ex- ante basis), not after the fact. This prevents a firm from including only their best- performing
portfolios in the Composite.
VERIFICATION
Firms that claim compliance with the GIPS standards are responsible for their claim of compliance and for maintaining that compliance. That is, firms self- regulate their claim of compliance. Once a firm claims compliance with the Standards, they may voluntarily hire an independent third party to perform a verification in order to
increase confidence in the firm’s claim of compliance. Verification may also increase the knowledge of the firm’s performance measurement team and improve the consistency and quality of the firm’s compliant presentations.
Verification is performed with respect to an entire firm, not on specific composites. Verification does not ensure the accuracy of any specific composite presentation.
Verification tests:
■ whether the investment firm has complied with all the composite construction requirements of the GIPS standards on a firm- wide basis, and
■ whether the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards.
