Thursday, February 3, 2011

Is GIPS at the center of the investment performance measurement universe?

At times it appears that many individuals in performance measurement, as well as those on the periphery (e.g., portfolio managers), see GIPS(R) (Global Investment Performance Standards) as being at the center of everything we do. It's quite common to hear, for example:
  • is our client reporting compliant with GIPS?
  • is our custodian compliant with GIPS?
  • are our returns compliant with GIPS?
"GIPS, GIPS, GIPS." That's the chant or mantra.We've experienced brokerage reps asking whether their firm complies with GIPS, even when the question doesn't fit. Custodians and GIPS? Hardly "perfect together."

And while like Copernicus and Galileo I am risking a charge of heresy or blasphemy to suggest otherwise, I feel compelled to do so: no, the world of performance measurement doesn't revolve around GIPS; there, I've said it! But at times it definitely appears to be that way. But just as the geocentric or Ptolemaic views were based on what appeared to seem quite intuitive and logical, the same kind of erroneous view is wrong regarding GIPS, in spite of similar apparently obvious appearances or what your intuition suggests.

GIPS has become the sole performance measurement standard that is referenced these days, in spite of the fact that others (e.g., the Bank Administration Institute's from 1968 and Investment Counsel Association of America's (now the Investment Adviser Association) from 1971) have existed and not been repealed. Clearly there is room for more guidance, but GIPS isn't the "end all" for all things performance. And while it serves as a useful tool to gauge how firms are doing, it's not always the ideal. For example, in the world of brokerage, where most of the firm's clients are non-discretionary, to provide time-weighted returns is ill advised, contrary to the GIPS standards (which speaks not to this part of our universe).

GIPS is an extremely valuable standard which we obviously support and often comment on. We have loads of clients who comply and encourage others to do so as well. However, to think that GIPS is a panacea that answers all questions related to performance is simply incorrect. Unfortunately, like the old saying that if the only tool you have is a hammer, all problems look like nails, it appears that GIPS is the sole standard and therefore the answer to everyone's performance question; but it isn't.


  1. To my understanding, GIPS do not allow return less than one year to be annualised.

    But US SEC allows money market fund to present 7 day annualized yield. Isn't it a breach of GIPS?

  2. Sursak, interesting question.
    First, regulatory rules take precedence.
    Second, the context in which the returns are presented for money markets is external to a GIPS presentation.
    Third, money markets tend to be less volatile and annualizing their returns is common, in order to provide an investor a sense of the annual expected return.
    Bottom line: I don't think it's an issue.


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