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We'll come back as we get introduced to the global investment performance standards abbreviated as gifts.
We shall learn why Gibbs was created and who it's meant for.
We learn the objectives and key characteristics of a quick introduction to composites and also Gibbs
compliance verification requirements.
Let's get rolling.
If you recall from standard 3D, we said that you were to give fair, accurate and complete information
when making performance presentations, while Gip's as a tool that you can use to help you and your
firm comply with the standard.
You're not obligated to comply with Gibbs.
It's just a recommendation.
So why is it necessary to have a common standard for performance presentation?
Imagine an unsophisticated investor with a large sum of inheritance to invest.
Several investment managers approach and present to her their track record of past performance which
manager achieved the objectively better result before the establishment of a common standard.
This was close to impossible due to the various ways investment firms can misrepresent their results.
The three main types of misrepresentation are using representative accounts survivorship bias and varying
time periods.
Representative accounts means that a manager selects a top performing portfolio as representative of
the firm's results.
You can see how unfair this is when the poorly performing accounts are not considered.
Survivorship bias refers to the exclusion of accounts that have been terminated, as these are likely
to be weak performers.
The manager's performance is likely upward biased.
Varying time periods is the selection of time periods with better returns.
This is not representative of the long term returns an investor can expect.
So as you can see, with so many misleading practices, it's no wonder unsophisticated clients have
no clue which is the more suitable manager, as comparing their performance is is not meaningful.
Jeeps are a set of ethical principles based on a standardized, industry wide approach to measuring
performance.
When firms adopt the same ethical standards to present their performance, they avoid misrepresentations
of performance and assure prospective clients that the historical track record they report is both complete
and fairly presented.
This enhances the credibility of the firm in the eyes of the investors, while firms that do not comply
may lose some potential business as a result.
This can push more firms to strive towards GIPS compliance.
Do note that only investment management firms that actually manage assets can claim compliance with
japes.
Investors benefit as they can meaningfully compare performance from different investment management
firms and have more confidence in the reported performance.
The main objective of GIPS is to establish investment industry best practices for calculating and presenting
investment performance that promotes investor interests and instills investor confidence.
In order to achieve this goal, the chip standard aims to ensure consistent and accurate investment
performance data in areas of reporting records, marketing and presentations.
Gips also has the goal of worldwide acceptance of a single standard for the calculation and presentation
of investment performance in a fair and comparable format with full disclosure.
When the standard is universal, it's much easier for investors to make meaningful comparisons between
firms from different countries.
This leads us to the next objective, which is to promote fair global competition among investment firms
without creating barriers to entry when companies use the same scale.
This leads to fair competition.
Barriers to entry for groups are low, as firms need only to self-regulate in order to claim compliance.
Which also leads to the last objective that is to promote global self-regulation.
When more and more firms claim compliance to chips, firms that do not get penalized indirectly through
less sales, so they in turn would promote global self-regulation.
And let's move on to the key characteristics of Gibbs.
Firstly, compliance to Gibbs must be on a firm wide basis and the firm must be fully compliant to Gibbs
if these two criteria are met, the following compliance statement may be used in its presentation reports
and marketing materials.
Be very clear that the firm cannot claim compliance if only a particular composite is compliant, if
only a particular calculation methodology is compliant or there is any aspect that is not compliant.
Partial compliance is strictly not allowed.
So the firm should never mention gaps in any of the presentations.
However, if local laws or regulations conflict with gifts in certain aspects, firms are required to
comply with the local laws in those aspects.
In such cases, firms can still claim compliance with Gibbs, but the conflicts need to be disclosed.
The notion of a firm wide basis begets the question about the definition of a firm.
A firm that wants to claim compliance must first define the firm.
You may find it trivial, but for large corporations that can be complicating factors like cross ownership,
subsidiaries and global operations that make it difficult to identify what the firm is.
Gips requires the definition of a firm to reflect the distinct business entity that's held out to the
investment public, regardless of the underlying ownerships and segregation is also japes recommends
that a firm takes on the broadest definition, so it should include all geographical offices marketed
under the same brand name.
For example, if Blue Bridge Investments operates offices in the U.S., EU and Australia, all these
offices should be considered as one single firm.
This also means that all the offices have to follow GIP standards in order for Blue Bridge to claim
GIPS compliance.
One of the key concepts of japes is the required use of composites.
A composite is a grouping of individual discretionary portfolios representing a similar investment strategy,
objective or mandate.
Under chips, a composite must include all actual fee paying current and past discretionary portfolios
managed in accordance with the same investment mandate, objective or strategy.
For example, a Fermé group, all the accounts that focus on global equities as one composite an all
accounts that focus on investment grade bonds as another composite.
This election process should be done according to pre-established criteria, not after the fact.
For instance, the firm should select all the accounts that should go into the various composites at
the start of the year and compute the composite performance at the end of the year.
Based on this list, this prevents the firm from choosing accounts in order to create composites with
superior returns.
And lastly, compliance with GIPS is purely voluntary and the responsibility of the firm to ensure and
maintain the compliance, as such, any firm can claim compliance to japes.
However, for better credibility, firms are encouraged to pursue independent verification of compliance
by a third party.
Be very clear that this has to be a third party as a firm cannot perform its own verification.
Verification must be performed with respect to an entire firm, not on specific composites.
The Verify, it does not ensure the accuracy of any specific composite presentation.
Rather, he must attest that the firm has complied with all GIPS requirements for composite construction
on a firm wide basis, and the firm's processes and procedures are established to present performance
in accordance with GIPS requirements.
After a third party is signed off on the verification, verified firms can include the following disclosure
in their marketing materials.
And that's our quick introduction to the global investment performance standards.