GIPS Workshop Laura Jirele-Borleske, CFA, CIPM, IACCP Jed Schneider, CIPM, FRM
Agenda GIPS Reasons for Compliance GIPS Upcoming Guidance Statements and GIPS 20:20 GIPS Hot Topics Recent SEC Actions GIPS Best Practices GIPS Technologies Making GIPS Compliance Easier
GIPS Reasons for Compliance Benefits of Compliance Global comparability Industry best practice Dynamically evolving Commitment to ethical practices Enhanced internal process & control Improved risk management Competitive advantage Transparency, credibility & trust Access to reliable data Self-regulation Long term success Compliance with the GIPS standards benefits the industry, the investors, and firms.
GIPS Reasons for Compliance Benefits of Compliance Enhanced ability to compare performance between firms and strategies Consistency in calculation and presentation of performance results, such as frequency of valuation, treatment of large cash flows and handling of accruals Full disclosure of important details on performance data presented, such as fees, composite construction criteria, dispersion of returns, etc. Firms recognized for adherence to industry best practice Strengthened internal processes and controls; improved risk management
GIPS Basics Ethical principles to achieve full disclosure and fair representation of investment performance for presentation to prospective clients Fundamentals of Compliance Input Data Calculation Methodology Composite Construction Disclosures Presentation and Reporting Real Estate Private Equity Advertising Verification Maintained by GIPS Executive Committee: the governing body comprised of delegates from around the world representing technical, industry & regional stakeholders
GIPS Basics Compliance with the GIPS standards requires compliance with not only the Standards themselves, but also with any Guidance Statements released by the GIPS EC as well as any Q&A s released on the GIPS Standards website.
GIPS Upcoming Guidance Statements and GIPS 20:20 Supplemental Information Guidance Statement (1Q 2017) Portability Guidance Statement (2017) Overlay Guidance Statement (2017) Verifier Independence Guidance Statement (2017) Benchmark Guidance Statement (2017-2018) Drawdown Portfolios Guidance Statement (TBD) Pooled Funds Guidance Statement (Public Comment 2016) Risk Guidance Statement (2017)
GIPS Upcoming Guidance Statements and GIPS 20:20 Supplemental Information Guidance Statement (1Q 2017) Original effective date 01/01/11 Has been released for public comment, period for comment ended 02/28/17 After public comment period ended the committee will review the comments and revise the guidance statement Revised guidance statement will be released, likely effective 01/01/18 Biggest change is to define supplemental information as only information included on the GIPS compliant presentation
GIPS Upcoming Guidance Statements and GIPS 20:20 Supplemental Information Guidance Statement What is Supplemental Information? Any performance-related information included in a GIPS compliant presentation that is neither required nor recommended Data that supplements the items in a presentation to help understand the performance results Examples of supplemental information: attribution, ex-ante risk, portfolio characteristics, certain theoretical performance (not linked) Examples of information that would not be considered supplemental: non-performance information such as biographies, firm information Information must not be false or misleading Must be clearly labeled as supplemental information
GIPS Upcoming Guidance Statements and GIPS 20:20 Supplemental Information Guidance Statement Why the Need to Revise? Address issues that have arisen since the original GS Opportunity to discuss what labeling performance as supplemental was designed to accomplish Differentiate between compliant information and other performance related information whether in a presentation or not
GIPS Upcoming Guidance Statements and GIPS 20:20 Supplemental Information Guidance Statement Highlights of the Proposed Guidance Statement Clarity on what is considered a compliant presentation A pitch book would not have to be considered a compliant presentation Would not require a supplemental information disclosure on anything outside of the compliant presentation Would need to disclosure where the reader can find the presentation (e.g., Appendix A) Regardless of where data may reside, it must adhere to provision 0.A.3 Firms must not present performance or performance-related information that is false or misleading The GIPS Technical committee has decided to place more emphasis on this provision
GIPS Upcoming Guidance Statements and GIPS 20:20 Supplemental Information Guidance Statement Highlights of the Proposed Guidance Statement GS refers to four examples of misleading information: 1. Theoretical performance (hypothetical, back-tested, etc.) linked to actual performance 2. Non-portable performance (from another firm) linked to current actual composite performance 3. Composite performance compared with an inappropriate benchmark 4. Performance not clearly labeled and described in a way that clarifies the exact nature of the information
GIPS Upcoming Guidance Statements and GIPS 20:20 Supplemental Information Guidance Statement Highlights of the Proposed Guidance Statement Firms need to make certain disclosures when using theoretical performance: Results are theoretical and are not based on performance of actual portfolios Basic description of the model, assumptions and inputs Any limitations in the results (e.g., does not include impact of economic or market factors in the investment decisions) Whether performance has not taken into account investment management fees, trading costs, etc.
GIPS Upcoming Guidance Statements and GIPS 20:20 Supplemental Information Guidance Statement Keep in mind: Supplemental information is not subject to a verification or a performance examination Must have policies and procedures for presenting supplemental information Firms must comply with all applicable laws Firms must have records to support supplemental information
GIPS Upcoming Guidance Statements and GIPS 20:20 Portability Guidance Statement (2017) Should go out for public comment in 2017 Provides additional guidance and clarification around the ability to port a track record from one firm to another, only composite performance can be linked at the new firm, and only if the firm chooses to port the record, it won t be required to do so Portability tests must be met on a composite-specific basis Will give further clarification on the one year grace period
GIPS Upcoming Guidance Statements and GIPS 20:20 Overlay Guidance Statement (2017) Should be issued for public comment in early 2017 The guidance will address how the GIPS standards may be applied to overlay portfolios as the managers may not manage the underlying portfolio Suggests that compliant presentations for overlay composites may require additional disclosures
GIPS Upcoming Guidance Statements and GIPS 20:20 Verifier Independence Guidance Statement (2017) Should be out for public comment in early 2017 Will define verifier independence and suggest situations that may create an independence issue
GIPS Upcoming Guidance Statements and GIPS 20:20 Benchmark Guidance Statement (2017-2018) Has been under review by the Benchmark Subcommittee Next step is to present the guidance statement to the Technical Committee Will address the benchmark-related provisions of the GIPS standards
GIPS Upcoming Guidance Statements and GIPS 20:20 Drawdown Portfolios Guidance Statement (TBD) The first draft has been discussed by the Technical Committee Will apply to drawdown portfolios, that must be commitment-based, closed-end, and have a capital call/distribution structure Will be required to follow the private equity provisions and guidance
GIPS Upcoming Guidance Statements and GIPS 20:20 Pooled Funds Guidance Statement (Public Comment 2016) Guidance statement went out for public comment in January 2016, ended in April 2016 The public comments are under review Completed guidance statement expected in 2017 or early 2018 Should clarify a firm s responsibilities with respect to the content and delivery of information to prospective pooled fund investors Must a prospective pooled fund investor receive a compliant presentation?
GIPS Upcoming Guidance Statements and GIPS 20:20 Pooled Funds Guidance Statement (Public Comment 2016) Purpose to address the application of GIPS from the perspective of firms that manage broadly distributed pooled funds Current standards to not speak to presenting pooled fund performance to a pooled fund prospect Applies to situations where a firm is marketing a broadly distributed pooled fund to more than one investor Does not apply to a strategy that includes a pooled fund in the composite Broadly distributed pooled fund include mutual funds but do not include hedge funds, private equity or real estate funds
GIPS Upcoming Guidance Statements and GIPS 20:20 Pooled Funds Guidance Statement (Public Comment 2016) The following would be required to be included in the official pooled fund documents and fund-specific marketing materials: 1. Fund s description of its investment mandate, objective or strategy 2. An indication of the pooled fund s risk; either qualitatively or as a quantitative metric (as mandated by local regulators) 3. Fund returns according to the methodology and time periods required by local laws and regulations 4. Benchmark total returns for same time periods 5. Currency used to express performance
GIPS Upcoming Guidance Statements and GIPS 20:20 Pooled Funds Guidance Statement (Public Comment 2016) GS also recommends: Sales Charges and Loads A GIPS pooled fund claim of compliance
GIPS Upcoming Guidance Statements and GIPS 20:20 Risk Guidance Statement (2017) Should be out for public comment in early 2017 Started with a lengthy document that may be turned into a white paper Will limit the scope of the guidance statement to a discussion of the requirements and recommendations of the GIPS standards requirements
GIPS Upcoming Guidance Statements and GIPS 20:20 GIPS 20:20 First discussed at the GIPS Conference in 2016 Focused on how to apply the GIPS standards more broadly to a more universal audience and on consolidating the standards and guidance as it exists today Will be the next major rewrite of the Standards, expected to be ready for release in 2020 Will consider the relationship of the firm to clients: One-To-One (separate accounts, client input) One-To Many (standardized/pooled, client agnostic) One-To-None (asset owner, no clients)
GIPS Hot Topics Recent SEC Actions SEC Awareness of GIPS Compliance In their examinations of advisers, the SEC takes a claim of compliance with the GIPS standards very seriously and has been training examiners on the Standards to increase their effectiveness during examinations. False claims of GIPS compliance are often cited as a misrepresentation of performance by the SEC. If a regulator does determine that a firm is not in compliance, the firm may be accused of fraudulent advertising. Penalties for misrepresenting compliance with the GIPS standards may include fines or being ordered to disclose to current and prospective clients, for a specified period of time, that the firm was found to be making fraudulent claims of compliance with the GIPS standards.
GIPS Hot Topics Recent SEC Actions ZPR Investment Management, Inc. F-Squared Investments, Inc. 13 firms who used returns provided by F-Squared Investments The SEC s review of performance related to the issues brought to light in the F-Squared and related cases continues
GIPS Hot Topics Recent SEC Actions
GIPS Hot Topics Recent SEC Actions
GIPS Hot Topics Recent SEC Actions
GIPS Best Practices Create a GIPS Committee Who participates? Depends on how firm is structured but consider: Marketing, Compliance, Operations, Portfolio Management, Technology, etc. Looking to become compliant? Get buy-in Make sure you are prepared (calculation methodology, documentation, etc.) Assign responsibilities Help determine policies Maintaining compliance: Keep firm updated on industry changes and the potential impact Place to make decisions (e.g., changes to inclusion criteria)
GIPS Best Practices Maintain clear, interpretable rules Employees can implement easily Systems can implement easily Regulators can understand Ensure they can be applied consistently Get input from others Ensure they follow/adhere to the GIPS provisions Avoid composite programs/systems dictating the rules Rules should make sense for your firm
GIPS Best Practices Minimum Market Value Do you need one for a strategy? Is it based on beginning market value, ending or both? Determine how you will handle portfolios falling below due to market conditions Create lower threshold or cushion What if market really goes south? Possibility all accounts go below minimum (does that make sense?) Work with PMs to review periodically
GIPS Best Practices Significant Cash Flow Policy What is it? It is not the threshold that requires a revaluation of your portfolio for a more accurate TWR (that s a large cash flow) Used when client-directed cash comes in or out of portfolio creating a nondiscretionary event Can temporarily remove portfolio from composite Can be based on % of assets or dollar amount Optional Can reduce number of portfolios in composite consider if you need one Recommendation to use a temporary portfolio Purchase the assets in the temporary portfolio and then transfer over when complete Move the assets in kind to temporary portfolio and then sell and withdraw cash
GIPS Best Practices Discretion Definition Work with PM team to determine the rules and how they will be monitored Keep objective and apply consistently Quantitative rules: Can be easy to implement but can cause portfolios to come in and out of composite constantly Hard to decipher if breach had to do with a discretionary, client-driven decision or even market conditions (e.g., cash constraint of 10%) Qualitative rules: More difficult to implement consistently Look at how it will affect managing portfolio BEFORE returns are calculated Keep in mind: The looser the rules around discretion, the more portfolios in the composite and wider dispersion The tighter the rules (e.g., any client-imposed restriction), few portfolios but less dispersion
GIPS Best Practices Portfolio Inclusion Work with portfolio management team to decide how quickly portfolios can be up and running after initial contribution Be consistent but understand there may be circumstances that would warrant something slightly different For example: Rule is for accounts to enter the composite at the beginning of the first full month Account opens at the close of March 31 st? Should it go in April 1 st? Document the scenarios clearly in your policies and procedures
GIPS Best Practices Manage the Composite Process Understand your colleagues needs: Performance frequency and availability Type of reporting in addition to presentations Ad hoc reporting Push back when requests may not seem appropriate; don t always acquiesce Know what is being handed out to prospects, advertisement, etc. (if you are not involved with the marketing piece) Provide senior management with reports on all strategies How many composites? How many one-account composites? Is there a risk of losing the last account? Make others aware; you don t want them surprised
GIPS Technologies Making GIPS Compliance Easier Many products available to calculate and report on composites Can be part of firm s performance calculation program or separate software Software firms proactive in industry; understand standards and keep updated on changes They don t just calculate composites (that s the easy part) And yes, spreadsheets can be used successfully (depends on how many accounts and composite however) As noted before: You don t want software to dictate your GIPS rules!!
GIPS Technologies Making GIPS Compliance Easier Calculations Ability to have options to calculate composites BMV, BMV+CF, aggregation of all data More frequently than monthly if desired Gross of fees, Net of fees, both Calculate other required statistics and in various ways Dispersion using standard deviation (sample and population), range, etc. Dispersion using asset-weighted or equal-weighted versions Volatility using either population or sample standard deviation # of portfolios, composite assets or % of firm assets, firm assets % of non-fee paying portfolios % of bundled fee portfolios Private Equity and Real Estate specific statistics
GIPS Technologies Making GIPS Compliance Easier Calculations (cont.) Calculate recommended statistics Other risk statistics (e.g., Sharpe Ratio, Information Ratio, Alpha, Beta) Equal-weighted composite
GIPS Technologies Making GIPS Compliance Easier Reporting Disclosures stored in software Flexibility to change when necessary including adding an error correction disclosure Ability to provide different period returns (e.g., 3 year) Customize look and feel Ability to produce reports in various formats
GIPS Technologies Making GIPS Compliance Easier Portfolio Inclusion/Exclusion Ability to place account in more than one composite Can move an account from one composite to another Can temporarily remove an account from composite Account composite assignment(s) should be tagged each month!! Minimum market values can kick out (or in) an account systematically Significant Cash flow rules can be applied systematically Remember, all rules can be composite specific
GIPS Technologies Making GIPS Compliance Easier Minimum Market Value As noted earlier, this can be challenging Systematic is easy but may not make sense (e.g., market fluctuation may put portfolios under a minimum) Ability to have a cushion in case market drops Account for cash flows in conjunction with minimum Ability to include based on beginning and/or ending market value As in all inclusion rules, it can be composite specific
GIPS Technologies Making GIPS Compliance Easier Audit Trail Composite or portfolio return changes documented and stored Composite rule changes documented and captured with change date Portfolio inclusion/exclusion changes captured with ability to document reason (e.g., free-form notes) If more than one person managing process, audit trail should come with ability to see who made what change
GIPS Technologies Making GIPS Compliance Easier Analytical Tools Warnings at account or composite level Missing (or incomplete) data or account information Nonsensical returns Reviewing outliers based on monthly (i.e., periodic) portfolio returns Can help determine if portfolio was misclassified or an issue with the return See composite constituents and impact (i.e., weight) to composite Ability to review historical stream of data Scenario Tools Ability to make a change and review data without saving (i.e., test environment) What if scenarios for internal use Extract tools for spreadsheet review
GIPS Technologies Making GIPS Compliance Easier Statistic and Internal Reporting Help management understand inventory of strategies and relative performance Review composites and number of portfolios to identify composites at risk of losing last portfolio Create list of portfolios, composite inventory, composite descriptions and definitions, etc. for verification
QUESTIONS