Views on improving the integrity of global capital markets
29 August 2016

The Four Toughest Questions Facing the Evolution of the GIPS Standards

The 21st Annual GIPS Standards Conference will be held 14–15 September 2017 in San Diego, California.

In order to stay in step with the dynamic and creative investment management industry, it is necessary that the Global Investment Performance Standards (GIPS®) evolve along with it. In its lifetime the GIPS standards have been updated two times, the last official update was in 2010, although we have released new and updated guidance statements more frequently.

The mission of the GIPS standards is to gain universal demand by asset owners, universal compliance by asset managers, and universal support from regulators. The industry has seen some interesting changes over the past few years, with the increase in passively managed index and ETF products and the proliferation of robo-advisors. These two forces have put the squeeze on active managers and will continue to put competitive pressure on their performance. The GIPS standards will continue to play an important role within this dynamic and it is critical for the Standards to remain current.

In short, to evolve the GIPS standards, CFA Institute must be open to asking some tough questions. It is only by addressing these questions that the Standards can be revised to provide the maximum amount of value in today’s environment. Here are four of the toughest questions that I think must be answered.

Tough Question 1: What is the value of a composite in a pooled fund world?

A major building block of the GIPS standards is the concept of a composite — the aggregation of similarly managed portfolios. The value of composites is most evident in the separate account space in which they have minimized the ability of managers to cherry-pick performance to present to prospective clients. But when we think about pooled vehicles, composites are not necessarily a good fit. When investing in a fund, the most appropriate performance to present is that of the fund, not of a composite that includes the performance of other portfolios. To answer this question, we must be able to evolve and develop the Standards to better fit this segment of the market in order to advance the mission.

Tough Question 2: Who is really the client?

As we look at the future of the GIPS standards, we are organizing our work based on the relationship between the asset manager and the client. But what is that relationship? In the separate account space, the relationship is one-to-one — each client has their own portfolio. In the pooled fund space, it is a one-to-many relationship — one asset manager to many clients invested in the same portfolio. Then we have the special case of the asset owner who has adopted the Standards for themselves. In such a case, there are essentially no clients, so it is a one-to-zero relationship. To answer the question of who is the client, we must address the evolution of market structure in order to evolve the Standards to keep them relevant for all varieties of asset managers, investment vehicles, and client relationships.

Tough Question 3: How can the unique needs of private wealth managers be addressed?

Although many mandates facing private wealth managers are generally managed via a separate account, the unique and customized nature of these portfolios tends to result in either very narrowly defined composites with few portfolios or more broadly defined composites with a wide dispersion of portfolio returns. It may simply be a case of a need for expanded guidance for private wealth managers, but it is certainly a market dynamic we need to explore.

Tough Question 4: Where does outsourcing fit in?

The expansion of the outsourced chief investment officer and fiduciary management are areas that beg for further examination. Similar to private wealth, this area may be one in which additional guidance will suffice, but it is critical for us to examine this questions to ensure the relevance of the Standards going forward.

Want to learn more about our approach to updating the Standards? Be sure to check out the livestream of the GIPS 20:20 session from the 20th Annual GIPS conference, which was held on 22–23 September in Boston, that talked about what’s coming in the next big update to the GIPS standards.

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About the Author(s)
Jonathan Boersma, CFA

Jonathan Boersma, CFA, is the former head of Professional Standards and former executive director of the GIPS standards at CFA Institute. He was responsible for developing, maintaining, and promoting the GIPS standards, Code of Ethics and Standards of Professional Conduct, and other CFA Institute standards of practice.

2 thoughts on “The Four Toughest Questions Facing the Evolution of the GIPS Standards”

  1. Stephen Campisi, CFA says:

    This is insightful guidance that brings the GIPS standards into a much broader context, making them meaningful for a wider audience. While in the past, one might have identified GIPS with individual products, incorporating the answers to these “tough questions” will make the Standards more relevant and helpful to asset owners, who think of their investments in the way they are described in this piece. So, major kudos for really advancing the conversation and the GIPS standards!

  2. Joe Hosler says:

    Excellent note as it demonstrates the dynamic nature of performance reporting. As the industry sees continued fragmentation, we, the asset managers and model providers, need to push for increased levels of transparency by the platforms and users of our products. When we control the entire “stack”, composites as defined are great. When we become an allocation/model provider, we still take a fiduciary role that needs to allow a feedback mechanism so that the end client is not lost within the process.

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