Investment performance reporting is crucial for investors to evaluate investment managers and make informed decisions. However, improper performance reporting could be misleading. This article will provide key information and conclusions on how to report investment performance professionally and meet Global Investment Performance Standards (GIPS). Proper performance reporting can help build investors’ trust and confidence. By following industry-wide standards, investment managers demonstrate commitment to ethical practices and full disclosure.
Executive summary of key requirements in GIPS standards
The Global Investment Performance Standards (GIPS) are ethical standards that aim to ensure fair representation and full disclosure of investment performance. Some key requirements include:
– Firms must include all actual discretionary portfolios in at least one composite to avoid cherry-picking better performers.
– Firms must provide compliant presentations to all prospective clients, including appropriate disclosures like the claim of compliance.
– Investment management firms must calculate portfolio returns using required methodologies to ensure comparability. Time-weighted returns are required for portfolios.
– Firms must construct meaningful composites representing similar investment mandates, objectives or strategies. Composite returns must be asset-weighted averages of the portfolios.
– Required information must be disclosed to allow prospects to understand the performance data, like composite description, benchmark, currency, fees, significant events, etc.
By complying with GIPS, investment managers commit to follow industry best practices and provide accurate, consistent data for performance evaluation.
How verification can enhance credibility of GIPS compliance claims
While firms can self-declare compliance with GIPS standards, verification by qualified third parties provides assurance that firms have adhered to the standards. Verification assesses whether:
– The firm’s policies and procedures comply with all applicable GIPS requirements
– The firm has calculated and presented performance in compliance with GIPS
– The firm’s composites and benchmarks are defined correctly
Having a verification report greatly enhances the credibility of a firm’s claim of compliance. Verification promotes internal discipline in adhering to policies and procedures. It also identifies any inadequacies in compliance. Prospects feel more confident knowing the performance presentation has been independently verified.
Many institutional investors require verification as part of their manager selection process. Large firms often get verified annually, while smaller firms may verify every two or three years. Verification should be performed by a qualified third party independent of the firm.
How performance reporting builds investor trust and confidence
By adhering to GIPS standards, investment managers commit to provide full disclosure and avoid misrepresentation that could mislead investors. Key benefits include:
– Enhanced comparability across investment managers facilitates manager selection. Investors can easily compare performance on an apples-to-apples basis.
– Composite returns provide insight into the firm’s true investment capabilities for a strategy.
– Required disclosures provide relevant details to contextualize performance data.
– Independent third-party verification enhances credibility of compliance claims.
– Ethical practices like fair representation of performance history builds investor trust.
Overall, GIPS compliance enables transparency that gives investors greater confidence in using performance data for decision making. Rather than making claims, investment managers prove capabilities through compliant presentations verified by third parties.
Investment performance reporting that follows Global Investment Performance Standards ensures fair representation and full disclosure. By adhering to industry best practices, investment managers demonstrate commitment to ethical conduct, transparency, and accurate performance data to build investor trust and confidence.