August 2018 saw the release of the 2020 Global Investment Performance Standards (GIPS) Exposure Draft
GIPS are a set of principles which firms can voluntarily implement as part of their reporting on investment performance during a period. There are some key changes due to be implemented you need to be aware of.
The aim of GIPS is to ensure consistency in disclosure of investment objectives and performance. This way, it enables easy comparison between investment firms.
The Exposure Draft is due to be released in the summer of 2019, with the standards to be effective from 1 January 2020.
Why has it been updated?
Most importantly is the need to consolidate a number of standards which have increased since GIPS were introduced back in 2010. These being, to allow for pooled funds to be disclosed more appropriately than under GIPS; and to ensure standards are more relevant for alternative funds.
I have highlighted the key changes below:
Composites and pooled funds
The definition of ‘pooled funds’ is where money from multiple investors is aggregated. Following the change they will no longer be required to be included within a single composite. This is providing that the strategy is offered solely through the pooled fund, and not within any other composite.
For Limited Distribution Pooled Funds, which involves contact with the final investor, you will be required to prepare a GIPS Pooled Fund report when presenting the fund to potential investors.
However, for Broad Distribution Pooled Funds, which conversely do not involve contact with the final investor, there will be no requirement to maintain a GIPS Pooled Fund report but you may still wish to do so.
Money weighted returns
Methodology based guidance can now be used as a basis for returns, compared to the current asset-class guidance. The Exposure Draft allows firms to present a money weighted return IRR (internal rate of return) if certain criteria are met:
- Closed end;
- Fixed life;
- Fixed commitment;
- Illiquid investments are a significant part of the investment strategy.
Updated GIPS report
The current term of ‘GIPS Compliant Presentation’ will be replaced with a different title depending on whether the report is for composites, pooled funds or asset owners. The respective titles will be:
- GIPS Composite report;
- GIPS Pooled Fund report;
- GIPS Asset Owner report.
Collectively known as a ‘GIPS report’.
Another important change is that fund providers must make every reasonable effort to provide the report to prospective composite investors.
Estimated transaction costs
The good news is that firms will be able to estimate the expected transaction costs where this cost is unknown when the report is repaired. This is providing that the estimate is at least equal to the actual transaction costs.
Previous performance of funds
It is no longer mandatory to link the performance of an acquired firm or investment team to performance at the new firm. However, you may still wish to do so. But it’s worth noting that you can only link performance if the portability tests are met. In addition, there is no limit on when firms may port history from a prior firm.
For private market investments, you will need to obtain either an external valuation, a valuation review or be subject to a financial statements audit – at least once every 12 months. This has been expanded from the current requirement where only real estate investments are subject to an external valuation.