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LEARNING MODULE

4
Introduction to the Global Investment
Performance Standards (GIPS)
LEARNING OUTCOMES
Mastery The candidate should be able to:

explain why the GIPS standards were created, who can claim
compliance, and who benefits from compliance
describe the key concepts of the GIPS Standards for Firms
explain the purpose of composites in performance reporting
describe the fundamentals of compliance, including the
recommendations of the GIPS standards with respect to the
definition of the firm and the firm’s definition of discretion
describe the concept of independent verification

INTRODUCTION
The objective of this reading is to provide candidates with an orientation to the GIPS
1
standards. It explains why the GIPS standards were created, who can claim com-
pliance, and who benefits from compliance. It also covers key concepts of the GIPS
standards—composites, the definition of the firm, and the definition of investment
discretion. Finally, the reading briefly discusses the purpose and benefits of verifica-
tion. Upon completion of this reading, candidates should appreciate the benefits of an
industry-wide set of standards for calculating and presenting investment performance
based on the principles of fair representation and full disclosure.
The 2020 edition of the GIPS standards has three chapters:
1. GIPS Standards for Firms
2. GIPS Standards for Asset Owners
3. GIPS Standards for Verifiers
Organizations that compete for business must comply with the GIPS Standards
for Firms.
Candidates are also responsible for reading the sections of the GIPS Standards
for Firms specifically referenced in this reading. A complete copy of the 2020 GIPS
Standards for Firms can be found here: https://​www​.cfainstitute​.org/​en/​ethics/​codes/​
gips​-standards/​firms.
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416 Learning Module 4 Introduction to the Global Investment Performance Standards (GIPS)

2 WHY WERE THE GIPS STANDARDS CREATED, WHO

CAN CLAIM COMPLIANCE, & WHO BENEFITS FROM
COMPLIANCE?

explain why the GIPS standards were created, who can claim
compliance, and who benefits from compliance
describe the key concepts of the GIPS Standards for Firms

The mission of the GIPS standards is to promote ethics and integrity and instill trust
through the use of the GIPS standards by achieving universal demand for compliance
by asset owners, adoption by asset managers, and support from regulators for the
ultimate benefit of the global investment community.
Institutions and individuals are constantly scrutinizing past investment perfor-
mance returns in search of the best manager to achieve their investment objectives.
In the past, the investment community had great difficulty making meaningful
comparisons on the basis of accurate investment performance data. Several perfor-
mance measurement practices hindered the comparability of performance returns from
one firm to another, while others called into question the accuracy and credibility of
performance reporting overall. Misleading practices included:
■ Representative Accounts: Selecting a top-performing portfolio to represent
the firm’s overall investment results for a specific mandate.
■ Survivorship Bias: Presenting an “average” performance history that excludes
portfolios whose poor performance was weak enough to result in termina-
tion of the firm.
■ Varying Time Periods: Presenting performance for a selected time period
during which the mandate produced excellent returns or out-performed
its benchmark—making comparison with other firms’ results difficult or
impossible.
Making a valid comparison of investment performance among even the most
ethical investment management firms was problematic. For example, a pension
fund seeking to hire an investment management firm might receive proposals from
several firms, possibly from different countries, all using different methodologies for
calculating their results.
The GIPS standards are a practitioner-driven set of ethical principles that establish
a standardized, industry-wide approach for investment firms to follow in calculating
and presenting their historical investment results to prospective clients. The GIPS
standards ensure fair representation and full disclosure of investment performance.
In other words, the GIPS standards lead investment management firms to avoid
misrepresentations of performance and to communicate all relevant information
that prospective clients and investors should know in order to evaluate past results.
The objectives of the GIPS standards are as follows:
■ Promote investor interests and instill investor confidence.
■ Ensure accurate and consistent data.
■ Obtain worldwide acceptance of a single standard for calculating and pre-
senting performance.
■ Promote fair, global competition among investment firms.
■ Promote industry self-regulation on a global basis.
 © CFA Institute. For candidate use only. Not for distribution.
Why Were the GIPS Standards Created, Who Can Claim Compliance, & Who Benefits from Compliance? 417

Who Can Claim Compliance?

Any firm that managesactualassets may choose to comply with the GIPS standards.
Consultants cannot make a claim of compliance unless they actually manage the assets
for which they are making a claim of compliance. They can claim to endorse the GIPS
standards and/or require that their investment managers comply with the GIPS stan-
dards. Similarly, software (and the vendors who supply software) cannot be “compliant.”
Software can assist firms in achieving compliance with the GIPS standards (e.g., by
calculating performance in a manner consistent with the calculation requirements of
the GIPS standards), but only a firm managing assets can claim compliance once the
firm has satisfied all applicable requirements of the GIPS standards.
Asset owners may comply with the GIPS standards in the same way as firms if they
compete for business. If they don’t compete for business but report their performance
to an oversight body, asset owners may choose to comply with the GIPS Standards
for Asset Owners.
Compliance is a firm-wide process that cannot be achieved on a single product
or composite. A firm has only two options with regard to compliance with the GIPS
standards:
1. fully comply with all requirements of the GIPS standards and claim compliance
through the use of the GIPS Compliance Statement; or
2. not comply with all requirements of the GIPS standards and not claim compli-
ance with, or make any reference to, the GIPS standards.
Complying with the GIPS standards is voluntary. Compliance with the GIPS
standards is not typically required by legal or regulatory authorities.

Who Benefits from Compliance?

The GIPS standards benefit firms and their prospective clients and investors, as well
as asset owners and their oversight bodies.
■ By choosing to comply with the GIPS standards, firms assure prospective
clients and investors that the historical track record they report is both
complete and fairly presented. Compliance enables the GIPS-compliant firm
to participate in competitive bids against other compliant firms throughout
the world. Achieving and maintaining compliance may also strengthen the
firm’s internal controls over performance-related policies and procedures.
■ Prospective clients and investors have a greater level of confidence in the
integrity of performance presentations of a GIPS-compliant firm and can
more easily compare performance presentations from different investment
management firms. The GIPS standards certainly do not eliminate the need
for in-depth due diligence on the part of the client or investor, but compli-
ance with the Standards enhances the credibility of investment management
firms that have chosen to undertake this responsibility.
■ Asset owners provide performance information to their oversight bod-
ies that allows them to make investment decisions and evaluate the per-
formance of the funds under their supervision. Particularly where asset
owners require their external managers to comply with the GIPS standards,
reporting to the oversight body using the same principles facilitates the
understanding of the sources of risk and excess return in the funds under
supervision.
■ Key Concepts
■ Key concepts of the GIPS standards that apply to firms include the
following:
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418 Learning Module 4 Introduction to the Global Investment Performance Standards (GIPS)

■ The GIPS standards are ethical standards for investment performance

presentation to ensure fair representation and full disclosure of investment
performance.
■ Meeting the objectives of fair representation and full disclosure is likely
to require more than simply adhering to the minimum requirements of
the GIPS standards. Firms should also adhere to the recommendations to
achieve best practice in the calculation and presentation of performance.
■ Firms must comply with all applicable requirements of the GIPS standards,
including any Guidance Statements, interpretations, and Questions &
Answers (Q&As) published by CFA Institute and the GIPS standards gov-
erning bodies.
■ The GIPS standards do not address every aspect of performance measure-
ment and will continue to evolve over time to address additional areas of
investment performance.
■ The GIPS standards require firms to create and maintain composites for all
strategies for which the firm manages segregated accounts or markets to
segregated accounts. Firms must include all actual, fee-paying, discretion-
ary segregated accounts in at least one composite defined by investment
mandate, objective, or strategy. Pooled funds must also be included in any
composite for which the pooled fund meets the composite definition. Firms
must maintain and make available information about all of the strategies
they manage using composites or pooled funds. These requirements prevent
firms from cherry-picking their best performance.
■ The GIPS standards rely on the integrity of input data, the quality of which
is critical to creating accurate performance presentations. The underlying
valuations of portfolio holdings drive performance. It is essential for these
and other inputs to be accurate. The GIPS standards require firms to adhere
to certain calculation methodologies to allow for comparability across firms.
Please read the Preface and the Introduction to the Global Investment Performance
Standards for Firms for additional insight into the history and purpose of the GIPS
standards.

3 COMPOSITES

explain the purpose of composites in performance reporting

One of the key concepts of the GIPS standards is the required use of composites. A
composite is an aggregation of one or more portfolios managed according to a sim-
ilar investment mandate, objective, or strategy. The requirement to create, use, and
maintain composites is designed to prevent firms from cherry-picking—using the
best-performing accounts to represent the performance of an investment strategy. A
composite must include all actual, fee-paying, discretionary portfolios managed in
accordance with the same investment mandate, objective, or strategy. For example,
if a GIPS-compliant firm presents its track record for a Global Equity Composite
(the Composite), the Composite must include all fee-paying portfolios that are man-
aged, or have historically been managed, in the firm’s Global Equity strategy. The
firm may not subjectively select which Global Equity portfolios will be included in
or excluded from the calculation and presentation of the Global Equity Composite.
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Verification 419

The determination of which portfolios to include in the Composite should be done

according to pre-established criteria (i.e., on an ex ante basis), not after the fact. This
prevents a firm from including only their best-performing portfolios in the Composite.
A firm that claims compliance must include all fee-paying, discretionary seg-
regated accounts in at least one composite. A firm must also include all fee-paying
discretionary pooled funds in any composite for which the pooled funds meet the
composite definition.
Please read Section 3.A. of the GIPS Standards for Firms on composites.

FUNDAMENTALS OF COMPLIANCE
4
describe the fundamentals of compliance, including the
recommendations of the GIPS standards with respect to the
definition of the firm and the firm’s definition of discretion

Several core principles create the foundation for the GIPS standards, including prop-
erly defining the firm, providing GIPS Reports to all prospective clients and certain
pooled fund prospective investors, adhering to applicable laws and regulations, and
ensuring that information presented is not false or misleading. Two important issues
that a firm must consider when becoming compliant with the GIPS standards are the
definition of the firm and the firm’s definition of discretion. The definition of the firm
is the foundation for firm-wide compliance and creates defined boundaries whereby
total firm assets can be determined.
The GIPS standards state “The firm should adopt the broadest, most meaningful
definition of the firm. The scope of this definition should include all geographical
(country, regional, etc.) offices operating under the same brand name, regardless of
the actual name of the individual investment management company.”
The firm’s definition of discretion establishes criteria to judge which portfolios
must be included in a composite and is based on the firm’s ability to implement
its investment strategies. If documented client-imposed restrictions interfere with
the implementation of the intended strategy to the extent that the portfolio is no
longer representative of the strategy, the firm may determine that the portfolio is
non-discretionary. Non-discretionary portfolios must not be included in a firm’s
composites.
Section 1 of the 2020 GIPS Standards for Firms addresses the fundamentals of
compliance in more detail.

VERIFICATION
5
describe the concept of independent verification

Firms that claim compliance with the GIPS standards are responsible for their claim
of compliance and for maintaining that compliance. That is, firms self-regulate their
claim of compliance. Once a firm claims compliance with the GIPS standards, it
may voluntarily hire an independent third party to perform a verification in order to
 © CFA Institute. For candidate use only. Not for distribution.
420 Learning Module 4 Introduction to the Global Investment Performance Standards (GIPS)

increase confidence in the firm’s claim of compliance. Verification may also increase
the knowledge of the firm’s performance measurement team and improve the con-
sistency and quality of the firm’s GIPS standards-related performance information.
Verification is a process by which an independent verification firm (verifier) con-
ducts testing of a firm on a firm-wide basis in accordance with the required verification
procedures of the GIPS standards. Verification provides assurance on whether the
firm’s policies and procedures related to composite and pooled fund maintenance,
as well as the calculation, presentation, and distribution of performance, have been
designed in compliance with the GIPS standards and have been implemented on a
firm-wide basis.
Verification is performed with respect to an entire firm, not on specific com-
posites or pooled funds. Verification does not ensure the accuracy of any specific
performance report.
Verification must be performed by an independent third party. A firm cannot
perform its own verification.
Third-party verification brings additional credibility to a firm’s claim of compli-
ance. A verified firm may provide existing and prospective clients and investors with
greater assurance about its claim of compliance with the GIPS standards. Verification
may also provide improved internal processes and procedures as well as marketing
advantages to the firm.
 © CFA Institute. For candidate use only. Not for distribution.
Practice Problems 421

PRACTICE PROBLEMS
1. A firm that does not adopt the GIPS standards could mischaracterize its overall
performance by presenting a performance history:
A. that includes terminated portfolios.

B. composed of a single top-performing portfolio.

C. for an investment mandate over all periods since the firm’s inception.

2. Which of the following statements regarding GIPS compliance is correct?

A. Asset owners that manage assets can claim compliance with the GIPS
standards.

B. Software that calculates performance in a manner consistent with the GIPS

standards can claim compliance with the GIPS standards.

C. Firms can comply with the GIPS standards by limiting their compliance
claims to the provisions they have chosen to follow.

3. Each composite of a GIPS-compliant firm must consist of:

A. multiple portfolios.

B. portfolios selected on an ex post basis.

C. portfolios managed according to a similar investment mandate, objective, or

strategy.

4. Verification:
A. must be performed on a firm-wide basis.

B. may be provided by the firm’s compliance department.

C. ensures the accuracy of a specific composite presentation.

5. Which of the following cannot claim compliance with the GIPS standards?
A. Investment management firms

B. Software vendors

C. Private pension funds

6. Which of the following is an abusive practice that the GIPS standards were de-
signed to avoid?
A. Presenting performance results that include terminated portfolios

B. Comparing performance results with an appropriate benchmark

C. Presenting performance results for select time periods

7. The process of testing a firm or asset owner that claims compliance with the
 © CFA Institute. For candidate use only. Not for distribution.
422 Learning Module 4 Introduction to the Global Investment Performance Standards (GIPS)

GIPS standards is referred to as a:

A. verification.

B. validation.

C. certification.

8. Firms that claim compliance with the GIPS standards are required to receive a
verification:
A. before the firm can initially claim compliance.

B. after the firm has claimed compliance for 12 months.

C. never; verification is not required.

9. Which of the following is not a commonly perceived benefit of the GIPS

standards?
A. Comparability of results across managers that claim compliance

B. Adherence to regulatory requirements

C. Increased confidence by investors and beneficiaries

10. When defining the firm, the GIPS standards recommend that firms should:
A. adopt the narrowest, most relevant definition of the firm.

B. adopt the broadest, most meaningful definition of the firm.

C. exclude offices operating under different brand names.

11. A composite return reflects the performance of:

A. all portfolios managed by the firm, regardless of investment strategy.

B. all discretionary portfolios that meet the composite definition.

C. all discretionary and non-discretionary portfolios that meet the composite

definition.
 © CFA Institute. For candidate use only. Not for distribution.
Solutions 423

SOLUTIONS
1. B is correct. Selecting a top-performing portfolio to represent a firm’s overall
investment results for a specific mandate, also known as using representative
accounts, is a misleading practice that is not allowed under the GIPS standards.
A is incorrect because including terminated portfolios is consistent with the
GIPS standards. If the firm instead presented a performance history that excludes
terminated portfolios, however, such a practice would be misleading and not al-
lowed under the GIPS standards. C is incorrect because presenting performance
for its mandate covering all periods since the firm’s inception is consistent with
the GIPS standards. If the firm instead presented performance for a selected pe-
riod during which it produced excellent returns or outperformed its benchmark,
however, such a practice would be misleading and not allowed under the GIPS
standards.

2. A is correct. Asset owners can claim compliance if they manage actual assets for
which they are making a claim of compliance. B is incorrect because software
(and the vendors that supply software) cannot be GIPS compliant. Software can
assist firms in achieving compliance with the GIPS standards, but only a firm that
manages actual assets can claim compliance. C is incorrect because a firm has
only two options regarding compliance with the GIPS standards: fully comply
with all applicable requirements of the GIPS standards and claim compliance
through the use of the GIPS Compliance Statement; or not comply with all
requirements of the GIPS standards and not claim compliance with, or make any
reference to, the GIPS standards.

3. C is correct. A composite is an aggregation of one or more portfolios managed

according to a similar investment mandate, objective, or strategy. For example, if
a GIPS-compliant firm presents performance for a global equity composite (the
composite), the composite must include portfolios that are managed, or have
historically been managed, according to the firm’s global equity strategy. A is in-
correct because a composite is an aggregation of one or more portfolios managed
according to a similar investment mandate, objective, or strategy. A composite
may consist of a single portfolio when it is the only portfolio managed according
to a particular investment mandate. B is incorrect because the determination
of which portfolio(s) to include in a composite should be done according to
pre-established criteria (ex ante basis), not after the fact (ex post basis).

4. A is correct. Verification is performed with respect to an entire firm, not on

specific composites. B is incorrect because verification must be performed by an
independent third party. C is incorrect because verification provides assurance
on whether the firm’s policies and procedures related to composite and pooled
fund maintenance, as well as the calculation, presentation, and distribution of
performance, have been designed in compliance with the GIPS standards and
have been implemented on a firm-wide basis; it does not ensure the accuracy of a
specific composite presentation.

5. B is correct. Only investment management firms and asset owners (including

pension funds, whether public or private) that manage actual assets may claim
compliance with the GIPS standards. Software vendors and other intermediaries
cannot claim compliance.

6. C is correct. The GIPS standards require performance to be presented for consis-

tent, standardized time periods.
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424 Learning Module 4 Introduction to the Global Investment Performance Standards (GIPS)

7. A is correct. Verification is the process of testing a firm or asset owner that claims
compliance with the GIPS standards, in accordance with the required verification
procedures of the GIPS standards.

8. C is correct. Firms are not required to be verified in order to claim compliance

with the GIPS standards, although verification is recommended and viewed as
best practice.

9. B is correct. Compliance with the GIPS standards is not typically required

by regulators, nor are the GIPS standards intended to cover all regulatory
requirements.

10. B is correct. Firms are encouraged to adopt the broadest, most meaningful defini-
tion possible of the firm.

11. B is correct. Composites must be defined based on investment mandate, objec-

tive, or strategy. Composites can include only discretionary portfolios.