GIPS 2020
Brief Introduction
The 2020 Global Investment Performance Standards (GIPS®) for firms, asset owners and verifiers released the final guidance on June 28, 2019, with an effective date of January 1, 2020. These standards will supersede those previously issued for 2010. The exposure draft and final 2020 GIPS encompass many significant changes. In addition to expanding on many key technical concepts specific to firms and asset owners, it reformats the current standards to segregate sections specific to firms, asset owners and advertising guidelines. One of the biggest changes with the 2020 GIPS standards is the shift from being based on composites and time-weighted returns, to allowing for more flexibility around the calculation and presentation of money-weighted returns. The most notable changes are summarized below.
New Format
One of the first things you’ll notice when you read the 2020 standards is that they are organized differently than the 2010 version. The 2010 version was initially written for firms, not asset owners. Asset owners are different than firms and, as such, need standards that are specifically tailored to their unique needs. Thus, the 2020 standards have a section dedicated to asset owners.
Guidance specific to certain asset classes (e.g., real estate and private equity) has gone away and in its place is guidance based on the type of vehicle(s) being managed and marketed (segregated account, pooled fund, or asset owner), as well as the type of returns being presented (time weighted or money weighted).
The layout was reformatted, making it easier for the reader to determine what sections are applicable to their firm.
Segregated Accounts vs. Pooled Funds
Pooled funds are not required to be included in composites if the strategy is only offered through a pooled fund structure. This change effectively eliminates the need for firms to create composites to house single funds. The 2020 GIPS Standards have defined two types of pooled funds:
Broadly Distributed Pooled Fund – a pooled fund that is regulated under a framework that would permit the general public to purchase or hold the pooled fund’s shares and is not exclusively offered in one-on-one presentations.
Limited Distribution Pooled Fund – any pooled fund that is not a broad distribution pooled fund. The distinction is important because each type of fund has different reporting requirements.
Given that BDPFs are typically marketed and presented to the general public under regulatory frameworks, requiring firms to create many single fund composites was deemed not useful. In GIPS 2020, firms do not have to prepare GIPS reports for BDPFs. This would eliminate the creation of single account composites for firms that manage BDPFs. However, BDPFs must be included in a composite if the fund meets the composite definition. This might occur if a manager offered the same strategy for a BDPF and for separate accounts. In addition, a firm could chose, at its discretion, to create a GIPS pooled fund report for a BDPF. We don’t expect many firms to do this, but it is an option.
Money Weighted Returns
Part of what GIPS 2020 sought to accomplish was to reduce asset class specific guidance. In GIPS 2020, firms may present MWR if they have control over the external cash flows of the composite portfolios or pooled fund, and the composite portfolios or pooled fund has at least one of the following characteristics:
Closed-end
Fixed life
Fixed commitment
Illiquid investments are a significant part of the investment strategy
With the changes to GIPS 2020, any asset class is able to use MWR if the criteria are met.
Firm Assets
The 2020 GIPS Standards allow firms to present firm-wide advisory-only and/or uncalled committed capital either as a separate value, or combined with total firm assets, as long as the total firm assets are also shown separately. For overlay strategy composites, firms may choose to present total firm assets or firm overlay exposure.
Transaction Costs
The GIPS 2020 Standards ffers the ability to estimate transaction costs (currently known as trading expenses) when actual transaction costs are unknown. In instances where transaction costs are unknown, firms are allowed to apply estimated transaction costs to calculate returns that are net of transaction costs. Firms will be required to disclose the use of estimated transaction costs, including how they were determined and the amount.
Carve Outs
The GIPS standards will once again allow firms to present segment performance by creating carve-outs with allocated cash. The 2020 Standards allows the ability to estimate transaction costs (currently known as trading expenses) when actual transaction costs are unknown. This practice was previously allowed but prohibited beginning January 1, 2010. While the preference is still for these portfolios to be managed separately with their own cash, firms will be allowed to allocate cash using a consistent methodology to calculate a return for the strategy. No specific method is required to be used when allocating cash; however, additional guidance will be provided regarding possible methods.
Once a firm manages a stand-alone portfolio in that strategy, the firm must then create a separate composite for the standalone portfolios.
GIPS Reports (GIPS Compliant Presentations)
The Compliant presentation, is now referred to as a GIPS Report. There are three different types of GIPS Reports, depending on what is being presented:
GIPS Composite Report
GIPS Pooled Fund Report (required for limited distribution pooled funds but recommended for broad distribution pooled funds)
GIPS Asset Owner Report
Firms that are already GIPS compliant and include limited distribution pooled funds in composites will not be required to prepare a GIPS Pooled Fund Report. Those firms may continue to present composite performance to pooled fund prospective investors. Additionally, there is now a requirement for firms to update the GIPS Report with data through the most recent annual period end within 12 months.
Example: any GIPS Reports distributed beginning January 1, 2023 must contain required annual data through December 31, 2021.
Portability
Linking a performance track record is now optional for firms. There is also no limit on when firms may port history from a prior firm or affiliation. If it takes three years to obtain records to support prior performance, the firm may port it at that time.
Additionally, when a firm acquires a non-compliant entity, the assets of that firm must meet all the requirements of the GIPS standards within one year of the acquisition date, on a prospective basis. The acquiring firm is not required to bring historical data into compliance. An addition to the three existing portability requirements includes the requirement for there to be no break in performance returns. Should a break in performance returns occur between the prior firm and current firm, linking of returns would be disallowed.
