Chris Lourens, Director, Solve Business Consulting, Member of the CFA GIPS® Standards Promotion Subcommittee
In the world of finance, knowledge is power, and trustees of retirement funds hold a significant responsibility in managing assets on behalf of beneficiaries. In this context, the Global Investment Performance Standards (GIPS®) is a powerful tool that empowers trustees to make informed investment decisions. However, it’s surprising that GIPS remains significantly underutilised in the South African retirement fund industry. In our previous article, we introduced GIPS at a high level. Now, we aim to shed light on what trustees should seek when engaging with GIPS-compliant firms, using the classic journalistic framework of “What, Why, How, Who and When.”
What is GIPS?
GIPS represents a set of ethical standards designed to calculate and present investment performance transparently and with full disclosure. Crucially, GIPS isn’t about showcasing current performance to existing clients. Instead, it serves as a valuable tool during the proposal phase when trustees and asset owners are seeking an asset manager. It is important to note that GIPS compliance is voluntary, meaning asset managers who adhere to it choose to do so because they want to uphold the highest ethical standards. GIPS provides a framework that covers various aspects of asset management, from defining the firm and discretion to composite construction, calculations, operations, marketing, disclosures and performance reporting. This framework ensures that asset managers present their performance to prospective clients with utmost transparency and integrity.
What does an asset manager have to do to be compliant?
To achieve GIPS compliance, asset managers must:
- Define the firm: This involves specifying what is included and excluded, including portfolios and the time period (with a minimum of five years) covered.
- Create a detailed policy and procedure document to explain how the firm complies with GIPS.
- Define investment strategies and discretion.
- Organise portfolios into composites, even closed ones.
- Calculate performance at the composite level.
- Comply with operational requirements as detailed by GIPS.
When prospective clients engage with asset managers, they should insist on seeing GIPS-compliant reports, not just a single portfolio’s return.
Retirement fund trustees shoulder the responsibility of managing assets on behalf of beneficiaries. Their decisions should align with the beneficiaries’ best interests and ensure compliance with applicable laws and regulations. Two key aspects of this responsibility are:
- Investment oversight: trustees must appoint the best asset manager.
- Fiduciary duty: trustees need to ask the right questions when asset consultants or managers present performance reports during the selection process.
GIPS was introduced to rectify wrong practices still prevalent among non-compliant asset managers.
- Model portfolios: presenting returns for a longer period than the asset manager’s actual history, often with flawed assumptions.
- Cherry picking: showcasing only the best performing portfolios among multiple similar strategies.
- Varying time periods: displaying returns for different timeframes, making comparisons challenging.
- Survivorship bias: focusing on portfolios that performed well while ignoring those that failed, leading to incomplete data and biased conclusions.
GIPS combats these practices by mandating the presentation of composites that include all portfolios, regardless of their performance.
How does GIPS work?
GIPS transforms complicated, diverse performance reports into standardised, easy-to-understand reports that promote transparency. GIPS ensures uniformity in reporting across compliant firms, covering input data, calculations, presentation, disclosures and more. This uniformity facilitates comparisons between asset managers, making it easier for trustees to make informed decisions.
How to utilise GIPS?
Trustees and asset consultants must consider GIPS as part of their selection process. This involves asking asset managers specific questions:
- Are you GIPS compliant?
- Have you been verified by an independent verifier?
- Can you provide GIPS-compliant composite reports?
- Can you provide a list of all your composites?
Insisting on these GIPS-compliant materials ensures that you receive the necessary information to make informed comparisons.
Who should be GIPS compliant?
GIPS compliance isn’t limited to a select few. In today’s global financial landscape, approximately 1800 asset managers worldwide have embraced GIPS.
In South Africa, just over 20 asset managers are GIPS compliant. The bulk of these are traditional asset managers.
In future, we hope to see multi-managers, alternative investment firms, discretionary fund managers (DFMs), wealth managers and asset owners embracing GIPS. Any firm managing assets in South Africa should seriously consider GIPS compliance, given its benefits.
When to implement GIPS?
While some South African firms adopted GIPS between 2000 and 2010, many have yet to do so. Trustees and asset consultants should insist on GIPS compliance to ensure best practices are followed.
Incorporating GIPS compliance into the selection process isn’t just a choice; it’s a commitment to due diligence. Trustees have a fiduciary duty to protect and grow assets while ensuring transparency and trust in their investment decisions. By embracing GIPS, trustees not only enhance their relationship with beneficiaries but also signal their commitment to the highest standards of accountability. Ultimately, GIPS empowers trustees and asset owners to make well-informed decisions and improve the efficiency of their manager searches. Trustees should strive to understand GIPS better and integrate it into their processes, fostering a culture of trust and transparency in the industry.