May 31, Senior Practice Fellow: Beth Kaiser, CFA, CIPM, Director, Investment Performance Standards, CFA Institute

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1 GIPS 2020 May 31, 2018 Senior Practice Fellow: Beth Kaiser, CFA, CIPM, Director, Investment Performance Standards, CFA Institute Guest Lecturers: Karyn Vincent, CFA, CPA, CIPM, Chairperson, GIPS Technical Committee Ann Putallaz, PhD, CIPM, Principal, AFP Consulting

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15 Agenda 15

16 Reimagining the GIPS Standards The Global Investment Performance Standards (GIPS ) are a set of voluntary standards for the calculation and presentation of performance Based on the ethical principles of fair representation and full disclosure The GIPS standards were last updated in 2010, with an effective date of 1 January

17 Reimagining the GIPS Standards Why change the GIPS standards? Composites are the foundation of the GIPS standards, but composites are not appropriate for all investment products. Pooled funds do not fit neatly into the current composite construction or GIPS reporting framework. Make the GIPS standards relevant for all asset classes, including alternative funds/strategies. Allows us to better address applicability for asset owners 17

18 Reimagining the GIPS Standards The challenge: Recast the GIPS standards while maintaining their integrity and cohesiveness. Incorporating new concepts while not heavily increasing the burden for firms already claiming compliance. 18

19 First step - The GIPS 2020 Consultation Paper Public comment period from May 16, 2017 through July 16, 2017 Vetted our new ideas and concepts with the public before creating the GIPS 2020 Exposure Draft Over 60 comments letters were received 19

20 First step - The GIPS 2020 Consultation Paper To receive feedback on key issues being considered for inclusion in GIPS 2020, e.g., Differentiate selling participation in a specific fund versus a composite strategy Remove the strict rules prohibiting the use of internal rates of return except in limited circumstances Require distribution of GIPS reports to current clients in addition to prospective clients Require timely updating of GIPS reports Determine if any currently required information in GIPS reports should be eliminated 20

21 First step - The GIPS 2020 Consultation Paper Identify any key topics that were missing and should be included No significant missing items were identified 21

22 Second Step - Input From Volunteers Numerous committees, subcommittees, and working groups have provided input and comments Alternative Strategies Working Group Benchmark Working Group Overlay Working Group Pooled Funds Working Group Risk Working Group 22

23 Second Step - Input From Volunteers Numerous committees, subcommittees, and working groups have provided input and comments Asset Owner Subcommittee Interpretations Subcommittee Investment Manager Subcommittee Verification Subcommittee Technical Committee Executive Committee 23

24 24 Pending Guidance Statements Over the past few years, multiple Guidance Statements were issued for publicly comments, but had not yet been finalized prior to drafting the GIPS 2020 Exposure Draft Updated Supplemental Information Guidance Statement Public comment period 12/16-2/17 Risk Guidance Statement Public comment period 6/17-9/17 Updated Verifier Independence Guidance Statement Public comment period 7/17-10/17 Overlay Strategy Guidance Statement Public comment period 8/17-11/17 Benchmark Guidance Statement Public comment period 11/17-1/18 24

25 25 Pending Guidance Statements All public comments were reviewed and considered by the respective working group or subcommittee Key requirements and recommendations from each Guidance Statements are incorporated in the GIPS 2020 Exposure Draft 25

26 Current Sections of the GIPS Standards Fundamentals of Compliance Private Equity Input Data Real Estate 6 8 Wrap Fee/SMA 2 Calculation Methodology Presentation & Reporting Composite Construction Disclosure 26

27 Proposed GIPS 2020 STRUCTURE General Provisions - Firms Fundamentals of Compliance Input Data and Calculation Methodology Composite Construction Composite Reports Time-Weighted Returns Money-Weighted Returns General Provisions Asset Owners Fundamentals of Compliance Input Data and Calculation Methodology Composite Construction Total Fund and Composite Reports Limited Distribution Pooled Fund Reports Time-Weighted Returns Money-Weighted Returns Advertising Guidelines Glossary Appendices 27

28 Composites Versus Funds Reporting Composites firm is selling a strategy to a segregated account client Firm must provide a composite-specific GIPS Report Limited Distribution Pooled Funds firm is selling participation in a specific fund Typically sold in a one-on-one meeting Firm must provide a fund-specific GIPS Report 28

29 Composites Versus Funds Reporting Broad Distribution Pooled Fund Typically no direct contact between the firm managing the fund and the pooled fund investor Firm has no requirement to provide any type of GIPS Report A Q&A has been issued to explicitly state that prospective investors in broadly distributed pooled funds are not required to receive a GIPS compliant presentation 29

30 Composite Construction Currently, firms must include all actual, fee-paying, discretionary portfolios in at least one composite Portfolios may be included in more than one composite There are no changes expected to the current composite construction requirements for composite strategies that are being sold A composite must include all portfolios that meet the composite s definition A composite definition is the detailed criteria that determine the assignment of portfolios to a composite 30

31 Composite Construction In GIPS 2020, firms will not be required to create a composite that includes only one or more pooled fund(s), if the strategy of those funds is not being sold as a composite strategy offered to segregated account clients Firms will be able to terminate composites that were created to include only one or more pooled fund(s) when the firm is not offering the pooled fund strategy as a composite strategy 31

32 Returns in GIPS Reports Composite returns firms may choose which returns to present Gross only, net only, or both Subject to regulatory requirements Limited distribution pooled fund returns must be net of all fund fees and expenses Not just trading costs and investment management fees 32

33 33 Money-Weighted Return (MWR) Possible Criteria & Considerations A firm may choose to use MWRs versus time-weighted returns (TWRs) if, for the composite or pooled fund: It has control over external cash flows, and The composite portfolios have, or the pooled fund has, at least one of the following characteristics: It is closed-end It has a fixed life It has a fixed capital commitment Illiquid investments are a significant part of the investment strategy 33

34 Broad Distribution Pooled Funds The Guidance Statement on Broadly Distributed Pooled Funds was adopted in 2017, with an original effective date of 1 January The focus of the Guidance Statement was on the content and distribution of materials for broadly distributed pooled funds In late 2017, the effective date was changed to 1 January 2020, to align with GIPS

35 Broad Distribution Pooled Funds While attempting to incorporate requirements from the Guidance Statement into the GIPS 2020 Exposure Draft, we realized the difficulties of implementing this guidance across markets with different regulatory structures and products There were challenges with the Safe Harbor provision promised in the Guidance Statement 35

36 Broad Distribution Pooled Funds It was therefore decided to recast this Guidance Statement as voluntary Advertising Guidelines Broad Distribution Advertising Guidelines are generally consistent with the requirements in the Broad Distribution Pooled Funds Guidance Statement These Advertising Guidelines will be included in the GIPS 2020 Exposure Draft 36

37 Broad Distribution Pooled Funds Firms that early adopted the Guidance Statement may continue to voluntarily adhere to the Guidance Statement until the transition to GIPS 2020 When GIPS 2020 become effective, firms that manage broadly distributed pooled funds and wish to comply with the GIPS standards must follow all of the provisions relevant to broadly distributed pooled funds that are contained in GIPS

38 Broad Distribution Pooled Funds If these firms choose to mention their compliance with the GIPS standards in advertisements, which include fund offering documents or marketing materials, they must follow the voluntary Broad Distribution Pooled Funds Advertising Guidelines 38

39 Other Key Topics in GIPS 2020 Portability Currently firms are required to link to performance from a prior firm, if portability tests are met, on a composite-specific basis In GIPS 2020, firms will be allowed to choose if they will link to performance from a prior firm, on a composite-specific or fundspecific basis, if portability tests are met 39

40 Other Key Topics in GIPS 2020 GIPS reports must be updated timely Within 6 months of annual period end Ability to use estimated trading expenses As long as returns calculated using estimated trading expenses are no higher than those that would have been calculated if actual trading expenses had been used 40

41 Other Key Topics in GIPS 2020 GIPS 2020 will address: Treatment of subscription lines of credit For limited distribution pooled funds that report MWRs Treatment of side pockets Calculating returns with and without side pockets Treatment of carve-outs Returns that are part of another portfolio (e.g. equity portion of a balanced fund) Treatment of committed capital in total firm assets Real estate portfolio external valuation frequency 41

42 Supplemental Information Supplemental information is any performance-related information included as part of a compliant presentation that supplements or enhances the required and/or recommended provisions of the GIPS standards Examples of supplemental information: Pure gross returns for wrap composites Asset class returns excluding cash 42

43 Supplemental Information Consistent with the approach in the Supplemental Information Guidance Statement: A Q&A was issued clarifying that any information outside of a compliant presentation is not required to be labeled as supplemental information Supplemental information must relate directly to the composite or pooled fund Supplemental information cannot be false or misleading 43

44 44 GIPS 2020 Timetable Consultative Document Public Comment Period May 16 though July 16, 2017 Exposure Draft Comment Period End Date Final Version August 31, 2018 October 31, 2018 (Verification) December 31, 2018 Lonely June 30, 2019 August 31, 2019 (Verification) Effective Date January 1, 2020 Presentations Prepared Per 2020 Requirements January 1,

45 45 Firm Notification Requirement Reminder A firm that claims compliance with the GIPS standards must notify CFA Institute of its claim of compliance The firm must submit a Claim of Compliance form: When the firm initially claims compliance Annually, by June 30 th 45

46 Resources Complete list of Guidance Statements Q&A database Webinars, articles and other resources Newsletter archive The GIPS Handbook Helpdesk Firm notification Certificate in Investment Performance Measurement (CIPM) 46

47 THANK YOU 47

48 Beth Kaiser, CFA, CIPM, Director, Investment Performance Standards, CFA Institute Ms. Kaiser is a director of investment performance standards at CFA Institute. She maintains the GIPS standards through management of the interpretations process, develops standards and guidance for new technical areas, and works extensively with volunteer committees. As founder and president of Kaiser Consulting Associates, Inc., she has worked with institutional investors on performance measurement and GIPS-related matters. Ms. Kaiser has worked for both investment managers and investors in various performance, risk, and operationsrelated roles both as an employee and a consultant. Before working for CFA Institute, she was a volunteer on the North American Investment Performance Committee, the Investor/Consultant Subcommittee of the GIPS Executive Committee, and the Intellectual Property Working Group of the GIPS Executive Committee. Ms. Kaiser holds a BS degree in finance from Florida Atlantic University. 48

49 Karyn D. Vincent, CFA, CPA, CIPM Ms. Vincent has over 28 years of experience providing Global Investment Performance Standards (GIPS ) verification and other performance related services. Prior positions include founding Vincent Performance Services LLC, and serving as the global practice leader for investment performance services at PricewaterhouseCoopers. She currently chairs the GIPS Technical Committee and is a member of the GIPS Executive Committee. She co authored with Bruce J. Feibel Complying with the Global Investment Performance Standards (GIPS ) (Frank J. Fabozzi Series) (Wiley, 2011). Ms. Vincent holds a BS in accounting from the University of Massachusetts Dartmouth. 49

50 Ann Putallaz, PhD, CIPM, Principal, AFP Consulting LLC Prior to founding AFP Consulting, Ann was Director of Data & Communication Services at Munder Capital Management, heading the team responsible for performance and competitive analysis data, compliance with the Global Investment Performance (GIPS ) standards, Requests for Proposals, questionnaire responses, and wrap/sma portfolio management. Before joining Munder Capital in 1995, Ann directed Client and Marketing Services for Woodbridge Capital Management, an investment subsidiary of Comerica Bank. Prior to joining Comerica in 1983 as an economist in its trust division, Ann was on the economics faculty at the University of Michigan. Ann is an active volunteer for CFA Institute. Among other assignments, she has chaired the US Investment Performance Committee, and was a member of the Global Investment Performance Standards (GIPS ) Executive Committee ( ), a standing committee of CFA Institute, chairing the Committee in Ann is currently chair of the Pooled Fund Working Group, a subcommittee of the GIPS Technical Committee. She is also involved in volunteer activities supporting CFA Institute s Certificate in Performance Measurement (CIPM) program. She holds a B.A. in economics from Smith College, magna cum laude, and M.A. and Ph.D. degrees in economics from the University of Michigan. 50

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