The CFA Centre for Financial Market Integrity – an arm of the CFA Institute, which drew up a Code of Ethics and Standards of Professional Conduct for the investment profession in the 1960s – has published new provisions and guidance for Global Investment Performance Standards (GIPS) that it says will establish an industry wide approach for how firms calculate and report investment performance results to prospective investors in separately managed (“wrap”) accounts.
“Fair representation and full disclosure are essential in helping investors evaluate investment alternatives,” says Jeff Diermeier, CFA, president and chief executive officer of CFA Institute. “The enhancements the CFA Institute Board approved for the GIPS standards will enable prospective investors worldwide to see more clearly the impact of fees charged by separately managed accounts on total returns and, second, to more easily compare investment products before making portfolio decisions.”
Assets held in separately managed accounts (SMA) exceeded US$600 billion in 2004, according to Cerulli Associates. While these portfolios have typically been a United States and Canadian product, they have expanded recently to other markets, including Japan and the United Kingdom. The new GIPS provisions and guidance were developed in response to the need for a global standard to calculate and present investment performance results for these products.
Provisions and guidance for wrap fee/SMA products are already in place for firms in the United States and Canada under the AIMR Performance Presentation Standards (AIMR-PPS), the US and Canadian version of GIPS. Such provisions have been part of the AIMR-PPS standards since 1995. Because the new GIPS enhancements will replace the existing AIMR-PPS provisions and guidance, firms currently compliant with the AIMR-PPS standards should only have a few changes as a result of the transition. Under the new GIPS standards, firms will have more options for how performance results can be calculated and presented. Multiple applications and samples are provided to assist firms in applying the Standards.
“The addition of wrap fee/SMA provisions and guidance to the GIPS standards culminates a lengthy process in which we considered a broad range of issues and concerns from the investment community,” says Alecia Licata, director of investment performance standards at the CFA Centre. “After two public comment periods and many rounds of discussions, we believe that we have fairly addressed the complexities raised about applying the GIPS standards to these products without compromising the need for transparency that is in investors’ best interests.”
Licata notes that the Centre received input from more than 75 investment management firms and associations, including the Money Management Institute and the Investment Adviser Association.
The effective date will be January 1, 2006, which was first highlighted in the second exposure draft of these provisions and guidance released in October 2004. No historical performance data is required before that date.
The new GIPS provisions and guidance will ensure that prospective wrap fee/SMA investors worldwide are provided with detailed information about the fees charged for these products and their impact on performance returns by requiring (1) the disclosure of a fee schedule reflecting the current fees charged to investors in the product, and (2) the presentation of performance on a “net-of-fees” basis. This helps prospective investors compare investment performance between different investment management firms globally, on an apples-to-apples basis.
The GIPS standards are voluntary, ethical standards used worldwide by investment firms for the calculation and presentation of investment performance information to prospective clients. Although voluntary, surveys show widespread adherence by global asset management firms. These global best practices are sponsored by the CFA Centre, the thought-leadership and policy-setting arm of CFA Institute, and 23 other investment organizations worldwide.
Compliance with the GIPS standards enables firms to participate in competitive bids against other compliant firms worldwide and helps potential investing clients by providing the best opportunity to fairly evaluate investment management firms globally.
“It may take time and resources for firms that have until now only considered GIPS compliance to gather the appropriate information necessary to satisfy the Standards’ requirements,” says Licata. “However, this process is not dissimilar to the industry transformation of the early 1990s when the AIMR-PPS standards were first introduced. And, the CFA Centre stands ready to help firms through this transition.”
The CFA Centre for Financial Market Integrity was created by the CFA Institute to develop timely, practical solutions to global capital market issues, while advancing investors’ interests by promoting the highest standards of ethics and professionalism within the investment community worldwide.
The CFA Institute is the global, non-profit professional association that administers the CFA curriculum and examination programme worldwide and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has nearly 77,000 members in 120 countries. Its membership includes the world’s 63,000 CFA charterholders, as well as 131 affiliated professional societies in 52 countries. Recently CFA Institute announced a GIPS certification program for performance measurement practitioners. The curriculum, now in development, will cover professional ethics; the GIPS standards; and investment performance measurement, analysis, and evaluation. CFA Institute anticipates offering the first examinations in 2006.