Applying the GIPS Standards to Asset Owners: It’s About Good Governance
The success of the GIPS standards is in large part due to the support of the asset owners who demand the compliance of asset managers. The ability to compare investment performance afforded by standardized calculation and disclosure requirements is an important factor when evaluating asset managers. By demanding GIPS compliance from the asset managers they hire, asset owners promote good practice based on the ethical principles of fair representation and full disclosure.
But what about the asset owners themselves? Can and should the GIPS standards be applied to them?
The GIPS standards can be adopted by any firm or entity that manages discretionary assets. In many cases, large asset owners look and operate just like asset managers. They have investment mandates, manage discretionary assets, and can be compensated based on performance — the difference is that they typically do not have external clients. These asset owners include pension funds, endowments, foundations, family offices, and other similar entities. Many of these asset owners utilize third-party sub-advisers to manage some, if not all, of their assets, while others may manage the assets entirely themselves. This, however, is no different than any other asset manager that may use a sub-adviser to manage a specific asset class, portfolio segment, or strategy. So, to answer the question directly, “Yes! The GIPS standards can and should be applied by asset owners.”
But because the GIPS standards were written from the perspective of the asset manager — not the asset owner — applying the standards to an asset owner is not as obvious in some areas. In response, the GIPS Executive Committee has developed guidance to assist asset owners in the application of the standards. An exposure draft of this proposed guidance is available for public comment until 3 June.
This question is sometimes asked: Because asset owners typically do not market their products and strategies, why would they want to comply with the GIPS standards?
Claiming compliance provides a distinct marketing and competitive advantage to asset managers, particularly when competing for institutional mandates. Other benefits of compliance — namely having a strong compliance framework and internal controls, robust policies and procedures, enhanced management information, and improved performance data for investment reporting — are realized by both asset managers and asset owners when applying the GIPS standards. It is these benefits that are attracting asset owners to the standards. In addition, oversight boards increasingly expect the performance of the asset owner to be reported according to industry best practice, and the GIPS standards meets this need. In fact, there are public pension funds, sovereign wealth funds, and social security funds that have already adopted the GIPS standards. Reporting performance according to a globally-recognized, ethical-best-practice standard is simply good governance.
I believe this is an incredibly important step for the GIPS standards, for the industry, and ultimately for the benefit of asset owners and their beneficiaries. Please take the time to provide your comments and feedback on this important initiative.
If you liked this post, consider subscribing to Market Integrity Insights.
Photo credit: @iStockphoto.com/TommL