The CFA Institute recently released its Guidance Statement on the Application of the GIPS Standards to Asset Owners. The Guidance Statement becomes effective on January 1, 2015. Overall, this Guidance Statement clarifies how the Global Investment Performance Standards (GIPS) can be applied by asset owners looking to claim compliance with GIPS.
What Led to This Guidance Statement
Asset owners can be pension plans, endowments, foundations, and other similar organizations that manage assets but not necessarily market to prospective clients. An asset owner’s prospective client is its oversight body. Some asset owners need to demonstrate to the oversight body that they follow an established set of best practices surrounding performance and disclosure. Compliance with GIPS is a logical answer to that. However, GIPS was initially created for marketing to prospective clients. As such, it was essential that certain clarifications and modifications be made so that GIPS could be applied by asset owners.
The following are some key provisions covered by the Guidance Statement.
Definition of Firm
Under the current standards, the firm is the investment firm, subsidiary, or division held out to clients or prospective clients as a distinct business entity. This definition, when applied to asset owners, is the entity that has discretion and autonomy over the pool of assets (also referred to as the fund). For some asset owners, such as pension plans, this could be defined by legislation. For others, such as endowments or family offices, this would likely be the entity set up by the governing body to manage the pool of assets.
Some asset owners manage assets internally and others outsource. The outsourcing of investment management is similar to a fund-of-funds manager using external managers. The ability to hire and fire external managers (i.e. sub-advisors) results in discretion for the asset owner.
Asset owners typically manage a multi-asset total fund. This total fund generally consists of numerous underlying portfolios. For the traditional manager, those underlying portfolios are accounts. For the asset owner, those underlying portfolios represent the various investment strategies that comprise the total fund.
In the case of an asset owner who manages only one multi-asset fund, there is only one required composite. If there is more than one fund, the asset owner must determine whether there are different mandates. A different mandate would trigger a different composite. A similar mandate means the same composite; however, the Guidance Statement offers the option for the asset owner to create separate composites even if they are the same mandate. This is due to the unique governance responsibilities of asset owners. Furthermore, additional composites may be created for underlying strategies, where appropriate. In those cases, all other requirements of GIPS, including guidance statements, such as the Guidance Statement on the Treatment of Carve-Outs, are required to be followed.
Compliant presentations for all created composites must be provided to those with direct oversight responsibility, such as the governing board or entity with oversight responsibility.
Gross and Net
Gross and net returns are complicated for asset owners.
- Full gross-of-fees return – This information must only be presented as supplemental information and only reflects the deduction of only transaction costs.
- Gross-of-fees return – This optional return is reduced by imbedded investment management fees and any other investment management fees paid outside of the pooled fund. This would not include fees paid to externally managed separate accounts.
- Net-of-external-costs-only return – This optional return reflects the reduction of all costs for externally managed separate accounts.
- Net-of-fees return – Required return which reflects the reduction of all investment management costs. In addition to the above noted fees, investment management costs may include overhead, allocated technology, and other costs of the asset owner. This is the only return that is required to be presented.
The key here for asset owners is full disclosure so that a reader can understand what is presented.
The Guidance Statement also addresses other topics, such as the following:
- Recordkeeping and Error Correction – Asset owners must follow the Guidance Statement on Recordkeeping Requirements and the Guidance Statement on Error Correction.
- Cash – Discretionary cash held for investment must be included; operating cash (i.e. checking) should not be included.
- Performance – Time-weighted returns (TWR) are required; money-weighted returns (MWR) are recommended.
- Inclusion/Exclusion – Because new and terminated portfolios are actually investments in a total fund, they are included as soon as funded when new and included through the last day managed when terminated.
- Composite Minimums – All discretionary portfolios (i.e. investments) within the total fund must be included. Therefore, there can be no minimum for the total fund. Composite minimums would apply if an asset owner chose to create additional strategy specific composites.
- Disclosure of Composite Description – There are additional disclosures to meet the standards. Some of those that would be expected to be disclosed would include asset allocation of the total fund as of the most recent annual period end; investment objective; actuarial rate of return or spending policy; and description of asset classes/groupings and related exposures.
- Benchmark – Since asset owners typically use a blended benchmark that changes periodically, disclosure of the recent components and weights is required along with making available historical information.
We will be happy to provide further information relating to this subject. For more information, contact Craig B. Evans, Manager, Audit & Accounting at email@example.com or 215.441.4600.