Did you attend the GIPS® conference this year? A record turnout was not a surprise with the rollout of GIPS 2020 the biggest topic! There was so much information to process. So, if GIPS 2020 has you overwhelmed, you are certainly not alone. GIPS 2020 seems like a lot because the standards have been split into 3 categories (for Firms, for Asset Owners and for Verifiers) but that means it is concise and more helpful for you to digest because the policies that apply to you are probably just in one of the three sections now. Before, everything was in one set and you had to decipher which policies did and did not apply to you. If you are an asset manager, you will want to focus on GIPS for Firms and what should be on the top of your list. Here are the top 4 changes to tackle as you adopt GIPS 2020 for firms.
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- Carve-outs
Remember GIPS 2010 when carve-outs were no longer allowed? We do for sure; it was huge for some of our clients to tackle, breaking out asset classes into individual accounts. If this was your firm, guess what? GIPS 2020 brings carve-outs back! Some firms may stick with their asset class-based composites, but you have the option to rewind back to carve-outs and that will be very attractive for a lot of firms. Stay tuned in early 2020 for an article just on this topic.
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- Return Calculations
A long-disputed topic has been money-weighted vs. time-weighted rates of return. We won’t pick sides, but we enjoy the debate! But there’s good news for the money-weighted fans. Once firms adopt GIPS 2020, the option to use money-weighted instead of time-weighted, if you meet the requirements, is extended significantly. If you aren’t sure, give us a call and we will see if you can make the switch!
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- Estimated Transaction Costs
As long as GIPS has existed, firms could not estimate transactions costs. This posed a serious issue as Wrap accounts became a larger part of many firm’s assets. With GIPS 2020, compliant firms can use estimated transaction costs in the calculation of performance. Of course, ethics still matter, so if transaction costs are known, you must use the actual transaction costs. This change to the standards is only for those situations where actual transaction costs are not known.
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- Pooled Funds
Are you a firm with mostly pooled funds and you are frustrated at maintaining composites for them? GIPS 2020 will solve your headache! If you don’t offer the strategies of these funds as a separate account, they will no longer need to be maintained as a composite. The GIPS standards define what type of funds and how the standards will apply but the good news is, once you adopt the newest standards, you will have more flexibility and for some of you, maybe less paperwork and maintenance – isn’t that always welcome?
Is that it? Of course not, the CFA spent a lot of time and effort to create this newest version. They also have changed terminology in different places, most notably, in our opinion, would be that your “compliant presentations” will now be “GIPS reports”. We see how that makes sense and is direct. There are other changes that you can work through with your verifier, but we hope this makes tackling all the new information a bit more manageable. The standards look very different, but the major changes are really only applicable to certain firms.