Performing due diligence on an emerging manager requires similar analysis to any other fund due diligence. However, the difference is in several key...
Manager Claim of GIPS Compliance – Does It Really Matter?
Investment Managers GIPS compliance and its impact on Asset Owners due diligence. GIPS due diligence questions. GIPS 2020 for private equity funds managers.
Is a manager claim of GIPS compliance just another marketing tool or an indicator of the investment manager’s trustworthiness?
The Global Investment Performance Standards (GIPS®) were launched in 2000, to help assure pension funds and other investors that asset managers’ investment performance is fairly presented and fully disclosed.
In the early years, GIPS compliance was primarily used by the first adopters among investment managers as one way to increase their chances to win mandates against rivals.
At the same time, many industry participants, especially alternative asset managers or investment managers in specific countries were not convinced of the necessity of GIPS compliance.
The focus has now changed. What was used primarily as a sort of marketing tool that promoted managers in front of asset owners has changed to proof of following the best practices and being in control of investment processes, as well as providing increased transparency.
Previously, the GIPS standards were more widely adopted in developed markets versus emerging markets. However, with challenges faced by managers in emerging markets to raise money from outside their regions, being GIPS compliant turned out to be helpful to add a certain level of confidence from foreign institutional investors. In the MENA region, Saudi Arabia is leading the way, led by the local GIPS Sponsor, CFA Society Saudi Arabia. To date there are three local investment managers claiming compliance, namely, Jadwa, GIB Capital and NCB Capital.
How important is GIPS compliance in manager screening?
More and more investors are insisting on GIPS compliance, and what for some managers was a possible comparative advantage, seems to have become a “must have.” More investment managers are excluded from searches due to a lack of GIPS compliance.
Do asset owners in their questionnaires go beyond the simple Yes/No answer to the question about GIPS compliance? Or are they just searching for some kind of assurance by asking this question?
If we investigate the details of how those searches are done, we will see that GIPS compliance-related questions within questionnaires are often asked at a high level, and often just in the form of a tick box.
To get a deeper insight into the manager’s GIPS compliance, due diligence questionnaire should contain more detailed questions about the GIPS related processes and practices.
How should GIPS compliance be addressed within due diligence questionnaires?
Questions about compliance with the GIPS standards should tackle topics such as: what are the main challenges faced to become compliant? How did the firm resolve them? is the manager verified, by whom and for which period? How did the manager choose the verification firm? What were the challenges the manager faced to be verified? How does the manager maintain compliance, considering the possible changes in teams, processes, and systems? Does the manager provide training on the GIPS standards to their employees? How does the manager monitor for changes in the GIPS standards, and how are needed changes to the firm’s processes made? What are the systems used in connection with the adoption and ongoing compliance with the GIPS standards?
Is GIPS compliance applicable to all asset classes and managers of all sizes?
Managers specialized in liquid assets, and some alternative investment managers, like Hedge Funds, are more likely to be GIPS compliant, while private equity managers still have not widely adopted the GIPS standards. Cumbersome, time-consuming, expensive are the main reasons cited by alternative investment managers. However, it should be noted that most, if not all, of what the GIPS standards require may already be done by a firm, but the existing policies may need to be slightly modified. For example, a firm may already be maintaining composites for its marketed strategies, so the firm would already have the infrastructure in place to expand this concept to all strategies. The cost of compliance depends not only on the size of the manager but also on complexity, number of strategies, etc. From an operational infrastructure perspective including data, valuation hierarchy, benchmark use and reporting, compliance with the GIPS standards can be incredibly valuable to an investment manager, not just to the investor conducting due diligence.
Will the release of the 2020 GIPS standards have an impact on the situation?
Although many asset owners require their external investment managers to comply with the GIPS standards, asset owners themselves typically do not claim compliance. However, with increased public scrutiny of some asset owners, such as public pension plans, GIPS compliance may indicate to the stakeholders that the asset owner is following universal standards and best practices related to performance calculation, reporting as well as procedures and controls.
Part of the proposed changes in the GIPS standards is to provide a clearer, more user-friendly path for asset owners seeking to comply. The 2020 GIPS standards will include requirements and recommendations tailored specifically to asset owners.
The new release should also facilitate the adoption among alternative investment managers (private equity, hedge, real estate, private credit) as the proposed changes to the GIPS standards address many of the issues that have made compliance with prior editions of the GIPS standards difficult for many of them. For example, the 2020 GIPS standards provide more flexibility to report money-weighted returns versus time-weighted returns. They also better accommodate the reporting of fund-specific performance versus composite performance.
The change in favor of more widespread adoption of the GIPS standards is evident from the numbers of GIPS compliant firms – as of 31 December 2018, 1,711 firms and asset owners from 46 countries and regions claim compliance with the current GIPS standards. This represents an almost 4% increase from the prior year end (source: CFA Institute).
CFA Institute anticipates that enhanced guidance on alternative assets in the 2020 GIPS standards will stimulate more alternative investment managers, that so far have been slower adopters of GIPS compliance, to choose to comply with the GIPS standards.
The final version of the 2020 GIPS Standards will be released on 30th June 2019, with an effective date of 1st January 2020.
To conclude – it is indisputable that the rate of GIPS compliance continues to grow and that it is making a significant impact in the investment industry. Apart from fulfilling its primary aim – ensuring fair representation and full disclosure of manager’s investment performance – GIPS compliance also communicates an investment manager’s wish to implement best practices for self-regulation and position itself as a trustworthy industry participant.
For more information please contact us.
This article has been approved by the CFA Institute. Thanks to Steve Wallace, Chartered MCSI, CAIA, Director of Outreach – MENA, CFA Institute, who co-authored it.