What Are GIPS?
There's a common expression, "apples-to-apples", used to describe two items that can be rightfully compared. "Apples-to-oranges" is used to indicate two items that really shouldn't be compared. We would not be surprised to learn that these analogies were coined by a financial planner (someone who probably enjoyed fruit), who may have been frustrated in trying to compare performance returns between investment managers.

As the industry has evolved, a number of different methodologies and approaches have developed to measure and present performance numbers. At the same time, issues have started to multiply: Time-weighted or asset-weighted? Discretionary accounts or all accounts? Before or after fees? Trade date or settlement date? Without any guiding principles, managers were essentially free to enact practices of their own choosing.

Depending on those choices, real differences could result in crafting a composite performance number, and the incentive to make the best number could take priority over the most accurate. Enter GIPS. These standards apply an industry-wide approach to measure and present performance numbers, and effectively prevent the possibility of a manager presenting figures that are not fully correct.

What Parties Do GIPS Apply To?
The GIPS apply directly to all firms that manage investment portfolios and that wish to market their previous track record in this practice and gather additional accounts by constructing performance composites. The development of a global standard is crucial to all firms, but particularly to those who may be in direct competition for business with foreign-based managers, to whom the same standards have not always applied. Global standards ensure that competition occurs on an equal footing and that apples-to-apples comparisons can be clearly drawn.

The Standards serve the companies that participate as they can now market their performance record and ensure immediate credibility by stating that they are GIPS compliant. However, clients and prospective clients are certainly the greatest beneficiaries to the industry-wide adoption of these Standards. Clients can now have a degree of confidence that the numbers they are using to compare managers will be representative of the actual experience of those managers and not a conveniently constructed record that may mislead or distort what actually happened. In addition, the existence of a standard helps clients and managers understand precisely how the numbers were determined. By focusing on the critical issues of how a firm achieved its performance, the client and prospective client can better understand "methodology" and "process", and be better informed - and more confident - in his or her money manager.

Country-by-Country Approach
As the need to facilitate comparability between investment managers has evolved, different sets of Standards were drafted and adopted for each country. Countries such as the U.S. and Canada, where the markets are highly developed and regulatory bodies play a significant role, tended to be the first to adopt performance presentation and measurement standards. The AIMR (Association for Investment Management and Research, the predecessor to the CFA Institute) has drafted several iterations of its Performance Presentation Standards, or CFA Institute-PPS, to help standardize performance measurement and presentation among firms in North America. As a result, true apples-to-apples performance comparisons can now be made for firms that claim compliance with the CFA Institute-PPS.

Global Marketplace
The CFA Institute-PPS have been successful in facilitating comparability between domestic firms, but disparities between countries remained an issue. Many countries had few, if any, guidelines. As the markets worldwide have become more interdependent, the need to standardize on a global basis has become apparent. The AIMR set its sights on these worldwide disparities starting in 1995, when it sponsored the first Global Investment Performance Standards Committee to develop a single standard for the entire world. Formal endorsement of the first GIPS was made in 1999.

The Vision of GIPS

1. Worldwide acceptance of one standard for the calculation and presentation of investment performance

2. A format that is accepted as fair to all, and that facilitates comparability between managers that adopt the standard

3.A format that provides fair representation and full disclosure, two of the core ethical principles of the CFA Institute

4.Accurate and consistent investment performance data for all necessary purposes (reporting, recordkeeping, marketing, client presentations)

5.Promoting fair global competition among investment management firms regardless of the market

6.Limiting barriers to entry for new investment management firms

7.Fostering the notion that the investment management industry can be proactive in its self-regulation initiatives while adhering to the highest ethical principles

GIPS: Composites And Verification

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