The GIPS standards are the Chartered Financial Analyst (CFA) Institute’s highest independent indicator of investment performance. They set out details of best practice in performance measurement and presentation. To formulate them, investment management firms set up “composites”. These are aggregates of similar portfolios for which they publish average performance. They can be any group of similar portfolios, such as all UK smaller companies, so could be funds or private clients. Portfolios can be in more than one composite although all discretionary portfolios have to be in at least one.
Once a firm is following all the standards, they can claim to be GIPS compliant. In addition, firms can also get an independent third party to audit their performance procedures against the standards, in which case they can say their compliance has been verified.
We feel this can justifiably make for a more meaningful comparison for advisers than single fund or portfolio reporting, as it prevents managers from reporting just their best performer in each sector. It also gives fund selectors a better chance of measuring like for like when they are picking investment managers, as all managers report investment performance on the same basis. However, managers should only report their performance figures in the prescribed manner – GIPS figures should not generally be used in marketing material or financial promotions.
Secondly, the CFA Institute only sets the GIPS standards and doesn’t comment on individual firms’ compliance. Undoubtedly this takes some of the value out of the accreditation, as it is based on the firms’ own interpretation of the rules, rather than any external body. Any adviser using this as a measure should therefore be prepared to do their own research on the funds.
While the standards followed by GIPS have their merits, there are other measures we believe are equally effective. For example, the way the costs are reported differs depending on the performance measurement system used. We also rate Asset Risk Consultants (ARC), which requires performance to be calculated net of all fees to make direct comparison more straightforward. This enables advisers to make open and transparent comparisons. ARC is also a better known performance measurement system in the UK, so is a more effective client-facing measure for us – and many other similar companies. However, GIPS is a global system, so probably better suits fund selectors with a global reach, rather than a UK focus.
Advisers should choose the most appropriate performance measure for their clients, and use it consistently and, of course, make sure that criteria other than past performance are part of their final selection process.
