Becoming GIPS Compliant

The GIPS standards are divided into eight sections that reflect the basic elements involved in presenting performance information: fundamentals of compliance, input data, calculation methodology, composite construction, disclosures, presentation and reporting, real estate, and private equity.

The provisions for each section are divided between requirements, listed first in each section, and recommendations. Firms must meet all the requirements to claim compliance with the GIPS standards. Firms are strongly encouraged to adopt and implement the recommendations to ensure that the firm fully adheres to the spirit and intent of the GIPS standards. Examples of GIPS-compliant presentations and a glossary of terms are included as appendices in the standards to assist the compliance effort.

1. Fundamentals of Compliance
Critical issues that a firm must consider when claiming compliance with the GIPS standards are defining the firm, documenting firm policies and procedures, maintaining compliance with updates to the GIPS standards, and properly using the claim of compliance and references to verification. The definition of the firm is the foundation for firm-wide compliance and creates defined boundaries whereby total firm assets can be determined. Once a firm meets all of the requirements of the GIPS standards, it must appropriately use the claim of compliance to state compliance with the GIPS standards.

2. Input Data
Consistency of input data is critical to effective compliance with the GIPS standards and establishes the foundation for full, fair, and comparable investment performance presentations.

3. Calculation Methodology
Achieving comparability among firms’ performance presentations requires uniformity in methods used to calculate returns. The Standards mandate the use of certain calculation methodologies for both portfolios and composites.

4. Composite Construction
A composite is an aggregation of one or more portfolios into a single group that represents a particular investment objective or strategy. The composite return is the asset-weighted average of the performance results of all the portfolios in the composite. Creating meaningful, asset-weighted composites is critical to the fair presentation, consistency, and comparability of results over time and among firms.

5. Disclosures
Disclosures allow firms to elaborate on the raw numbers provided in the presentation and give the end user of the presentation the proper context in which to understand the performance results. To comply with the GIPS standards, firms must disclose certain information about their performance presentation and policies adopted by the firm. Disclosures are to be considered static information that does not normally change from period to period. Although some disclosures are required of all firms, others are specific to certain circumstances and thus may not be required. No “negative assurance” language is needed for non-applicable disclosures.

6. Presentation and Reporting
After gathering the input data, calculating returns, constructing the composites, and determining the necessary disclosures, the firm must incorporate this information in presentations based on the requirements set out in the GIPS standards for presenting the investment performance returns. No finite set of provisions can cover all potential situations or anticipate future developments in investment industry structure, technology, products, or practices. When appropriate, firms have the responsibility to include other information not necessarily covered by the Standards in a GIPS-compliant presentation.

7. Real Estate
These provisions apply to all investments where returns are primarily from the holding, trading, development, or management of real estate assets. Real estate includes land, buildings under development, completed buildings, and other structures or improvements held for investment purposes. The provisions apply regardless of the level of control the firm has over management of the investment. The provisions apply irrespective of whether a real estate asset or investment is producing revenue. They also apply to real estate investments with leverage or gearing.

8. Private Equity
These provisions apply to all private equity investments other than open-end or evergreen funds (which must follow the main GIPS provisions). Private equity investments must be valued according to the GIPS private equity valuation principles. Private equity refers to investments in non-public companies that are in various stages of development and encompasses venture investing, buyout investing, and mezzanine investing. Fund-of-funds investing as well as secondary investing are also included in private equity. Investors typically invest in private equity assets either directly or through a fund of funds or limited partnership.