| GIPS 101 |
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| 1.04.2007 | |
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bfinance answers this week's questions on GIPS 1. What are GIPS and how did they come about? The Global Investment Performance Standards ("GIPS") were developed by the CFA Institute (formerly the Association for Investment Management and Research - AIMR) together with local professional investment bodies and performance experts across the globe. The aim was to create a global standard for the calculation and presentation of investment performance. The Standards were issued in 1999 with the most recent draft effective from 1 January 2006. The Standards sought to remove inconsistency in both calculation and presentation across the global investment industry resulting from locally developed rules and practices. The advent of GIPS provides investors with a level platform from which to evaluate the investment performance of a number of investment managers. GIPS are voluntary, ethical standards and are currently used in more than 25 countries. 2. Who uses them? The key users of the Standards are the investors and investment consultants who are able to enquire during their investment manager selection process whether the firm is compliant with GIPS, and whether their claim of compliance has been verified by an independent third party. As a result of this 'filter' in the selection process many of the world's investment managers have responded by using GIPS as a standard for the production and reporting of their investment performance to potential investors. Increasingly, compliance with GIPS Standards is being seen as industry best practice and this is expanding from institutional investment management to Private Equity, Hedge Funds, Real Estate and Private Banking firms. Furthermore, a whole industry has grown up around the Standards to assist investment managers in attaining and maintaining GIPS compliance. These include performance systems providers offering calculation and presentation software packages reflecting the GIPS Standards; training companies offering courses on the Standards; and verification firms offering independent third party verification of a firm's claim of compliance. The CFA Institute have created a website to provide guidance and materials to the users of the Standards. 3. What are the benefits of GIPS compliance? An investment firm that claims compliance with GIPS demonstrates an acceptance of ethical standards, transparency and integrity. These are valuable attributes for firms seeking to manage other people's money. GIPS allows investors to recognise such ethically focused firms. GIPS enables investors to review the performance of a number of investment managers using a common platform of calculation and presentation, regardless of the investment managers' geographic location. GIPS is not a standard used for reporting investment performance to investors, but instead a standard for presenting performance to potential investors. It is very rare for a pension fund to become GIPS compliant as it is not usually itself an investment firm seeking investors to invest in its investment strategies. However, pension funds can, and should, enquire of their investment managers during their selection process whether or not they are compliant with GIPS. It is common to see questions regarding GIPS being raised, typically: whether the firm claims GIPS compliance or whether they have been verified by an independent third party. |
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