Friday, July 15, 2011

Providing performance results in a "non-GIPS" world

We have been in discussions with a firm that doesn't claim compliance with GIPS(R) (Global Investment Performance Standards), but still wants their returns "verified." They wanted to know what they need and what their options are.

The introduction of GIPS doesn't mean that firms can't show prospects performance results; granted, GIPS is considered "best practice" within our industry, but there can be a variety of reasons why a firm isn't able to comply. And so, what can they do? Here are three approaches:
  1. Hypothetical or model results. With this option, the firm doesn't use real portfolios but a model portfolio to represent their strategy. This would be the least attractive option, but is permitted. Adequate disclosures are needed. (Steve Stone and I wrote an article on this topic for the CFA Institute, which you might find of value).
  2. A representative portfolio. This is probably more attractive than a model, but less attractive overall, because it suggests "cherry picking," and you'd also have to deal with cases where an account may terminate. However, it's an option nonetheless. It would require appropriate disclosures as to what the returns represent.
  3. A composite of all accounts in the strategy. This could be just like what GIPS requires (e.g., asset-weighted returns) or not completely (e.g., to use equal-weighted returns). This is preferable to the other two options shown (but obviously not as preferable as GIPS compliance), and will require your rules for composite construction to be identified, and preferably written down. Some form of disclosures would be needed, but perhaps not as many as the other options.
We conduct "non-GIPS" verifications for several firms, and so this option (to get your returns verified by an independent, third party) exists in this arena, too. We obviously encourage all managers to comply, but recognize this isn't always possible. This doesn't mean you can't have your numbers reviewed.

Oh, and when it comes to firms that fall under their country's regulator(s) (e.g., the Securities and Exchange Commission (SEC)): you will want to ensure that your materials conform with their rules, just as GIPS requires.


  1. Stephen Campisi, CFAJuly 16, 2011 at 8:13 AM

    I find the idea of a "non-GIPS" verification to be quite useful. GIPS is intended for a specific audience: those who want to evaluate a manager of a particular product or strategy (e.g. a large cap growth fund.) This is only a slice of the world of investments. For those who manage a client's total portfolio (e.g. a financial advisor) the GIPS standards may not be as relevant. However, prospects and clients would benefit from the validation of the performance results they see. It would be helpful to know that the primary causes of manipulation and error, such as cherry picking accounts have been eliminated.

    Secondly, this provides the opportunity to answer the prospect's real questions: "How likely am I to get the return of the composite?" and: "Do all clients get equal treatment?" To answer these questions, you need to show an equally weighted composite. In my opinion, an equally weighted composite should be the standard, with a size weighted average return taking second place as "supplemental information." Frankly, clients don't care about the return on the average dollar; they care about the return that THEY are likely to receive. Somehow, this simple concept failed to win the day, but it remains the key focus of prospects, nonetheless.

  2. Steve, thanks for your insightful comments!


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