Challenges Seen In Complying With New GIPS
June 1, 2009
Changes to the Global Investment Performance Standards (GIPS) that will be implemented over the next two years will require modifications to financial operations and IT systems that could prove cost prohibitive for some.
The GIPS were created by the Chartered Financial Analyst (CFA) Institute in 1999 as a uniform and consistent, albeit voluntary, way for fund managers across the globe to calculate and report their investment performance to current and prospective clients. By doing so, managers can compete on an equal basis while investors can make fair comparisons.
As GIPS has become a de facto requirement for investment funds to win institutional assets, firms which can't afford to make the changes needed to become GIPS' compliant could be placed at a competitive disadvantage.
There are two sets of changes to the GIPS, one of which is set to take effect on Jan. 1, 2010, and the others, still in draft form, in January 2011. Of the two modifications, the ones slated to go into effect this coming January appear to be the more worrisome, although firms had plenty of time to prepare; they were first released in 2005. The revisions aren't meant to be a major overhaul of GIPS, but to reflect more sophisticated investment strategies, which include exotic derivative and structured products, as well as the growth in cross-border distribution of funds.
Included in the version of the GIPS effective January 2010 is the requirement that fund managers no longer include cash in the buckets of securities--or composites--they carve out of their portfolios to measure their performance. In addition, fund managers must establish policies to keep track of and disclose performance errors. They must also revalue their composites each time there is a "large external cash flow" representing a subscription or redemption.
As of January 2011, firms must report portfolio performance based on fair-value accounting principles, value real-estate portfolios annually and disclose an annualized ex-post standard deviation of the composite and its benchmark for the previous three-years.
"For firms which are not currently GIPS compliant, the data management requirements will be onerous," says Carl Bacon, chairman of Statpro, a London-based performance measurement software firm. "Funds must have sufficient historical data and supporting documentation to prove GIPS compliance, know where their data is stored, ensure its accuracy and its enterprise-wide consistency," adds Bacon who is also a member of the GIPS executive committee which oversees the guidelines.
Boston-based research firm Aite Group predicts that investment firms will increase their spending on third-party performance measurement software packages alone to $464 million in 2010 from $370 million in 2008 to improve their performance reporting. Among the popular vendors Aite cited in addition to Statpro were DSTi; Eagle Investment Systems; SunGard; Thomson Reuters and Wilshire.
The Operational Issues
Beyond the costs of licensing performance measurement software, which could easily exceed $100,000 annually, fund managers must also set up procedures on how they will comply with GIPS, according to Joseph McDonagh, performance product manager for Eagle, a subsidiary of Bank of New York Mellon, in Boston.
Firms will need to ensure their policies are consistently followed and can be monitored on an ongoing basis. For some fund managers that will mean setting up a dedicated performance measurement team within their middle office operations. The total price tag, several fund managers estimated, could easily come to over $1 million annually for larger firms managing complex trading strategies.
