Chris Lourens, Director – Solve Business Consulting (Pty) Ltd
The South African financial system has always been described as a first-world system and something we can be proud of. Investment management, as a sub-sector, is no exception. In this dynamic world of investment management, transparency and accuracy play pivotal roles in building trust and fostering effective relationships between asset managers and their clients. Yet, in this complex ecosystem, deciphering true performance comparisons can be a daunting task for both investors and investment professionals. This is where the Global Investment Performance Standards (GIPS®) play a vital role as a set of ethical guidelines that presents a transformative framework for improving transparency and trust.
Many investment managers implemented GIPS between 2000 and 2010. After a quiet period between 2010 and 2020, even more investment managers started to implement GIPS. It is an onerous process to remain GIPS compliant, and not all firms have kept abreast of changing requirements. The most significant change was the new GIPS 2020 standards. Despite their best efforts, many asset managers may not be truly compliant.
As a result, investors need to ask probing questions to satisfy themselves that the investment managers claiming compliance, truly comply. This ensures a level playing field and transparency between all competing investment managers.
In this article, we will explore how an investor will ensure that he is investing with a true GIPS-compliant investment manager and what should be done to leverage the value of GIPS.
Enhancing Investor Confidence:
GIPS compliance serves as a testament to an investment manager’s commitment to best practices. Prospective clients are more likely to trust the performance information presented by a GIPS-compliant firm. This is especially critical during the Request for Proposal (RFP) process, which is inherently challenging and time-consuming for investors seeking detailed insights into an investment manager’s investment strategies and products.
One of the fundamental GIPS requirements is that you have to register your claim of compliance with the CFA Institute before you can publicly claim compliance. Although 38 Investment managers in South Africa claim that they are GIPS compliant – only 25 are listed on the CFA database.
Streamlining the RFP Process:
The RFP process is a pivotal phase where investors aim to select the ideal investment manager to oversee their investments. By posing the right questions regarding GIPS compliance, investors can streamline this intricate process and make meaningful comparisons. GIPS compliance acts as a common denominator, enabling investors to compare apples with apples, thus facilitating a more efficient and informed decision-making process.
Beyond Basic Inquiries:
In South Africa, many RFPs limit their inquiries as to whether an investment manager is GIPS compliant, occasionally touching upon verification status only. However, recognising the inadequacy of such basic inquiries is crucial. To make well-informed decisions, investors must delve deeper, seeking comprehensive information that goes beyond mere compliance status.
What questions should be asked on an RFP?
Crafting effective questions on an RFP is a delicate task, particularly when it comes to understanding the intricacies of GIPS. Without a thorough grasp of GIPS, it becomes easy to pose misguided questions that not only miss the mark but can also lead to misleading information. Examples are:
- Do you have a GIPS-compliant system?
- Is your outsourced back-office vendor GIPS compliant?
- Do you have a GIPS-compliant portfolio you can show?
Despite 24 years of evolution in the GIPS standards, these incorrect and outdated questions are still forming part of some RFPs. For this reason, the CFA Institute has published a template of questions investors should add to their RFPs (CFA Institute®: GIPS® Standards Model RFP Template, 2021).
- Does the firm claim compliance with the GIPS standards?
- If the firm does not claim compliance with the GIPS standards, please explain why.
- Please provide the firm definition used to determine total firm assets and firm-wide GIPS compliance.
- Please provide the periods for which the firm claims compliance with the GIPS standards.
- Please provide the firm’s list of composite descriptions, list of limited distribution pooled fund descriptions, and list of broad distribution pooled funds.
- Has the firm been verified?
- Please identify the period(s) for which the firm has been verified.
- Please provide the name of the verification firm.
I would like to add the following questions:
- Please provide GIPS Composite reports for the requested strategies.
- Have you registered your claim of compliance with CFA?
What should you receive?
Investors must receive a GIPS Composite report for each strategy they require (including disclosures). Just knowing they are GIPS compliant, but not receiving GIPS Composite reports is meaningless. These documents will provide the investor with the ability to compare composites from competing firms on a fair basis.
Moreover, the investment manager is required to furnish a comprehensive list of composites accompanied by their respective descriptions. Investors also retain the right to request the manager’s GIPS policy and procedure document should they seek additional information.
Optimal value cannot be attained without compliant reports.
Conclusion
Crafting compelling questions for an RFP demands a thorough understanding of GIPS. Steer clear of superficial inquiries, and delve into comprehensive questions that highlight the investment firm’s dedication to adhering to GIPS standards. By honing your approach, you elevate the RFP process to a level of clarity, empowering you to make informed decisions and choose partners who resonate with the ethical and standardised reporting principles of GIPS.
ENDS
Bibliography
CFA Institute®. (2021). GIPS® Standards Model RFP Template
