GIPS for Asset Owners: Clearing That Final Hurdle


The Olympic games are now past us and one of the key events that draws my attention is the track and field hurdles. These world class athletes are sprinters that routinely clear 3.5’ hurdles over the course of 400 meters as if they don’t exist. Surprisingly, where these athletes tend to fail is on the final hurdle. Less because of fatigue and more due to a focus shift to the nearest competitor or the finish line. This is analogous to many asset owners that clear numerous performance measurement and reporting hurdles routinely, then fail to implement compliance with the Global Investment Performance Standards (GIPS) for extraneous reasons. In this blog I am hoping to provide information to help asset owners clear this final hurdle.

Asset Owners Are Closer Than They Think

The GIPS sponsors are constantly encouraging adoption for market participants, and they have adapted the standards well to encourage asset owners by providing them with their own user-friendly provisions. These provisions have been modified to make sense for asset owners and provide flexibility to accommodate distinct aspects of each business. The good news is that many asset owners are far closer to establishing GIPS compliance than they believe, assuming that they adhere to policies and procedures of their compliant industry peers.

From my experience with asset owners, many firms typically execute performance calculations in accordance with GIPS standards. This is a significant first step which constitutes the keystone of a compliant structure. Asset owners also tend to focus on a total fund concept in conjunction with the inclusion of additional operational composites where applicable (portfolio manager, incentive comp, analytical, etc.). The good news is that this total fund concept has gained acceptance within the standards and allows asset owners to leverage existing processes.

Another significant hurdle that firms fear is the onerous task of presenting the 10 years of performance history required. The GIPS requirements state that firms may initiate compliance with just one year of history and build on a go-forward basis until 10 years are reached. Or that firms can start today and build toward the next calendar year. This provision alone should alleviate fears and entice many to consider.

What Are the Benefits For Asset Owners Claiming Compliance?

Asset managers are coerced into GIPS compliance by market forces as they need to align with industry peers in a fierce competition for assets. But asset owners do not feel this same peer pressure and therefore do not feel obligated to become compliant. Oddly enough, a large portion of asset owners hire subadvisors and often require that these subadvisors are compliant and adhere to GIPS standards.

Typically, the impactful questions are: What is the business benefit for an asset owner to become GIPS compliant and will the effort and dollars spent prove worthwhile? In answering this question, I stress the three C’s with firms considering the benefits of compliance: Credibility, Comparability, and Culture.

First, GIPS compliant performance will provide credibility as well as assurances to senior management, investment committees, and board members providing oversight. GIPS at its core is an ethical standard and making an official public claim of ethical adherence sends a reassuring message to the consumers of performance data and reports.

The next C is comparability which is a fundamental component of the standards that was built on the apples-to-apples principle for assessing performance and risk of similar strategies. Aligning firms by composites, benchmarks, and peers allow for an appropriate comparison of performance results. If the goal is to demonstrate skill and outperformance on a relative basis, then the function requires relevant and comparable measurement.

The most underappreciated and often overlooked of the three Cs is culture. The cultural benefits are addressed by the requirement for firm-wide compliance with the standards. This firm-wide requirement will alter behavior and facilitate coordination between organizational functions, inclusive of the front-office and sales functions. This will also provide the performance and operations teams (or team designated responsible for compliance) with a more influential platform necessary to ensure that all key contributors are informed of and aligned with GIPS rules and requirements

What Are the Costs?

The costs surrounding compliance are typically associated with audits and verifications, hiring and/or training specialized personnel, and potential technological upgrades.

Technically, firms do not need to be verified by an independent external verifier, but this practice is strongly encouraged (and highly advisable for firms new to the standards). From my experience, I have encountered capable firms that will provide verifications at a reasonable cost. Having an experienced verifier validating such a highly visible claim would be prudent, and there are several capable options beyond the large accounting public accounting firms (aka The Big 4) that specialize in this area and provide focus.

Building capability with existing personnel or hiring capabilities may be necessary. However, more likely than not the performance team has CFA charterholders/candidates or CIPM certificate holder/candidates that are familiar with the basics of the standards. The asset owner provision is also far less onerous on performance teams in the absence of marketing efforts.

Technological upgrades may or may not be necessary for most firms. Many performance tools often have embedded composite or aggregate capabilities to leverage. I am confident that there are still many firms maintaining compliance with the suite of Microsoft tools. Not advisable but it is done more than one would think.

As mentioned previously, historical data requirements are a lesser concern with just one year being the threshold. Start with just one year of performance history then build until 10 years of subsequent reported history is attained. Another option is to start today and be ready one year from today (on a calendar year basis).

One key risk is if asset owners begin to market themselves as asset managers, this would and should invoke the broader GIPS standards which will require significantly more effort and incur regulatory scrutiny.

To the Podium

In closing, every asset owner should consider attaining and publicly claiming compliance with the GIPS standards. Investment organizations are typically teaming with CFA charterholders and CIPM certificate holders that understand the inherent benefits associated with the standards. The track to GIPS compliance is manageable and the costs are less than a leap for most firms. The next time you are asked ‘Why should we as an asset owner become compliant with GIPS’, the response should be ‘Why not? Let’s clear that last hurdle and go for (the) gold (standard)’!