Ten Takeaways from the GIPS® Standards Conference

The 24th Annual GIPS® Standards Virtual Conference was held on 27–29 October 2020, with more than 600 attendees from 37 countries. Much of the conference focused on new requirements in the 2020 edition of the Global Investment Performance Standards (GIPS®), and attendee participation was quite active, with hundreds of questions submitted during the conference. For those of you who were not able to attend, following are some of the key takeaways from the conference that may assist you as your firm transitions to the 2020 edition of the GIPS standards.

1. When updating policies and procedures, firms are not required to document anything that is not applicable to the firm.

A firm must document all of the policies and procedures it follows for meeting the requirements of the GIPS standards, as well as any recommendations the firm has chosen to adopt. There is no requirement to create and document policies and procedures to comply with requirements that do not apply to the firm. For example, assume a firm does not manage overlay strategies. The firm is not required to document anything in its policies and procedures about overlay strategies. Firms, however, must actively make a determination about the applicability of all the requirements of the GIPS standards and document their policies and procedures accordingly (see the Explanation of Provision 1.A.5).

2. Firms are no longer required to have a policy for ensuring the existence and ownership of client assets.

In the 2010 edition of the GIPS standards, Provision 0.A.5 required firms to document their policies and procedures used in establishing and maintaining compliance with the GIPS standards, including ensuring the existence and ownership of client assets. This language was intended to require firms to ensure that model or hypothetical portfolios were not included in total firm assets or composite assets. Suggested policies for meeting this requirement included obtaining custodian or broker statements and reconciling the firm’s records with the custodian’s or broker’s records. The 2020 edition takes a different approach, and Provision 2.A.2 states that total firm assets, composite assets, and pooled fund assets must include only actual assets of the firm. The 2020 edition goes a step further with Provision 2.A.4 stating that composite and pooled fund performance must be calculated using only actual assets managed by the firm. Therefore, firms must have policies and procedures to ensure that total firm assets, composite assets, and pooled fund assets include only actual assets managed by the firm.

3. The definition of “composite description” has changed.

A composite description, which is general information regarding the investment mandate, objective, or strategy of a composite, is required to be included in two places — on the firm’s list of composite descriptions, and in a composite’s GIPS Composite Report. Under the 2020 edition, composite descriptions must include three new items:

• the material risks of the composite’s strategy;  
• how leverage, derivatives, and short positions may be used, if they are a material part of the strategy; and
• if illiquid investments are a material part of the strategy.

Under the 2010 edition, material risks and the ability to use leverage, derivatives, and short positions were recommended to be included in composite descriptions but were not explicitly required to be included. Under the 2010 edition, if illiquid investments were a significant part of the composite strategy or if there was a strategic intent to invest in illiquid investments, firms were required to disclose this in the composite description. This requirement, however, was found in the Guidance Statement on Alternative Investment Strategies and Structures and may have been overlooked. This requirement now applies to all composites and not only to alternative strategies. For additional guidance, see the Explanation of Provision 1.A.22.

4. All actual, fee-paying, discretionary portfolios are not required to be included in at least one composite.

Under the 2010 edition, all actual, fee-paying, discretionary portfolios were required to be included in at least one composite. Under the 2020 edition, this is no longer required. Instead, the following is required:

• All actual, fee-paying, segregated accounts must be included in at least one composite. (A segregated account is a portfolio owned by a single client.)
• All actual, fee-paying, discretionary pooled funds must be included in at least one composite if they meet a composite definition. (A pooled fund is a fund whose ownership interests may be held by more than one investor.)

Under the 2020 edition, firms are no longer required to create or maintain composites that include only one or more pooled funds, if the strategy of the pooled fund(s) is not offered as a segregated account. Firms may terminate any composite that includes only one or more pooled funds if that composite is not offered as a segregated account strategy.

5. Firms no longer need to include multi-strategy portfolios in a composite, if all components are included in a composite.

All actual, fee-paying, discretionary segregated accounts must be included in at least one composite. For multi-strategy and multi-asset-class segregated accounts, this can be accomplished by:

• Including the total multi-strategy or multi-asset-class segregated accounts in composites, or
• Including each of the underlying portfolios or carve-outs of the total multi-strategy or multi-asset-class segregated accounts in composites.

This guidance replaces the guidance included in a Q&A issued in November 2012 stating that a discretionary multi-strategy portfolio was required to be included in a multi-strategy composite, even if all of the underlying portfolio segments were included in composites. This change applies to all periods for which the firm claims compliance (see the Explanation of Provision 3.A.5).

6. As of 1 January 2020, firms may no longer exclude pooled funds from composites if they are managed the same as segregated accounts.

Under the 2010 edition of the GIPS standards, based on language in the Composite Definition Guidance Statement, firms could define composites based on portfolio type (e.g., what we now call segregated accounts versus pooled funds) even if they were managed according to the same strategy. For example, assume a firm manages both segregated accounts and pooled funds in the growth equity strategy. Under the 2010 edition, the firm could create a Growth Equity Composite that includes only segregated accounts and create a separate Growth Equity Pooled Fund Composite that includes only pooled funds. The only differentiator between these two composites is portfolio type.

As of 1 January 2020, firms may no longer take this approach. As of 1 January 2020, pooled funds that are managed in a strategy that also is managed for or offered as a segregated account must be included in the same composite as any segregated accounts that are managed in that strategy. Firms may no longer differentiate composites based solely on portfolio type, if all portfolios are managed the same, and portfolio type does not matter.

Continuing with the growth equity example, firms can do one of the following:

• As of 1 January 2020, firms can redefine the Growth Equity Composite (that previously included only segregated accounts) to include both segregated accounts and pooled funds, on a prospective basis.
• As of 1 January 2020, firms can redefine the Growth Equity Pooled Fund Composite (that previously included only pooled funds) to include both segregated accounts and pooled funds, on a prospective basis.
• Firms can create a new Growth Equity (Total) Composite that includes pooled funds and segregated accounts, for all periods.

This consolidation of composites is required only if the pooled funds are managed the same as segregated accounts. Because of liquidity considerations or diversification requirements, pooled funds often are managed differently from segregated accounts. If a pooled fund is truly managed differently, it may be excluded from the composite that includes segregated accounts (see the Explanation of Provision 3.A.3).

7. When using a GIPS Composite Report for prospective investors, firms do not have to disclose the fee schedule and expense ratio of each pooled fund included in the composite.

Firms must make every reasonable effort to provide a GIPS Report to all prospective investors for limited distribution pooled funds. The firm must provide either

• a GIPS Pooled Fund Report for the specific pooled fund, or
• a GIPS Composite Report for a composite that includes the pooled fund.

Whichever GIPS Report is provided to the prospective investor must include the fee schedule and expense ratio for the pooled fund for which the firm is providing the GIPS Report.

Assuming the firm decides to provide a GIPS Composite Report, the firm is not required to include the fee schedule or expense ratio for any other pooled funds that are included in the composite. Firms must include the fee schedule and expense ratio only for those pooled funds for which the firm is providing the GIPS Composite Report to prospective investors.

8. Expense ratios must be annualized.

GIPS Reports that are presented to prospective investors for a specific pooled fund must include that pooled fund’s current expense ratio. If the pooled fund’s expense ratio is calculated for a period of less than a year, the expense ratio must be annualized. For example, assume a pooled fund starts on 1 April, and the expense ratio calculated for the period from 1 April through 31 December is 0.75%. This partial-year expense ratio must be annualized to determine the expense ratio for the full year. In this case, 0.75% for 9 months equates to an annual expense ratio of 1.00%. Firms must do this to allow a prospective investor to compare expense ratios across firms. Firms may also present the unannualized expense ratio of 0.75%, but this must be in addition to the annualized expense ratio of 1.00%. If the firm chooses to present an unannualized expense ratio, it must clearly disclose the fact that the expense ratio is a partial-year expense ratio (see the Explanation of Provision 4.C.11).

9. Firms are not required to update GIPS Reports for pooled funds or composites that are not being marketed.

The 2020 edition of the GIPS standards has a new requirement for updating  GIPS Reports. Firms must update GIPS Reports  within 12 months of the end of the most recent annual period end. Assuming a firm reports performance on a calendar-year-end basis, it must include calendar-year returns for 2020 in the GIPS Report no later than 31 December 2021.

The new requirement to update GIPS Reports applies to any GIPS Report that is being distributed. If a firm has GIPS Reports for composites or pooled funds that are not being marketed, it is not required to update these GIPS Reports, just for the sake of updating them. If, however, the firm is required to provide a GIPS Report for a non-marketed composite, because the firm decides to market the product or a prospect asks for the GIPS Report, then the firm must update the GIPS Report (see the Explanation of Provision 1.A.16).

10. The concept of material errors applies only to information in GIPS Reports.

A material error is an error in a GIPS Report that must be corrected and disclosed in a corrected GIPS Report. The firm must then provide the corrected GIPS Report to certain parties, including current clients that received the GIPS Report that had the material error. Firms must define materiality within their error correction policies and procedures to determine how they will handle material errors in GIPS Reports.

Under the 2010 edition, guidance within two Q&As stated that errors could occur outside of what we now call GIPS Reports, such as on the firm’s list of composite descriptions or on the firm’s website, and the Q&A clarified these errors would be subject to the firm’s error correction policy. Under the 2020 edition, material errors apply only to information included in GIPS Reports. For guidance on establishing an error correction policy, see the Explanation of Provisions 1.A.20 and 1.A.21.    

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