Newly-Proposed Guidance Statement on Risk

The GIPS Technical Committee is seeking comments on a newly-proposed Guidance Statement on Risk and how it relates to the presentation of risk, both quantitatively and qualitatively within the compliant presentation. The Guidance Statement will address when and where risk-related information is appropriate, recommended, and required to be included in compliant presentations.

Presentation of the Three-Year Annualized Ex-Post Standard Deviation

GIPS standard 5.A.2 requires firms to present the three-year annualized ex-post standard deviation, using monthly returns, for the composite and the benchmark. If the firm determines that the three-year ex-post is irrelevant or inappropriate for a given strategy, reasoning supporting this conclusion must be disclosed (GIPS Standard 4.A.34). Firms electing not to present the three-year annualized ex-post are required to present an additional three-year ex-post risk measure that is available and appropriate.

Firms already presenting the three-year annualized ex-post are not required to change anything to their compliant presentations. The proposed Guidance Statement will eliminate a firm’s ability to elect to not present the three-year annualized standard deviation. Under the new guidance, all firms will be required to present the three-year annualized ex-post standard deviation as well as disclose whether the risk measure was calculated using gross or net returns. GIPS standard 5.A.2 does not currently address disclosure of using gross versus net returns in the calculations. Firms will still be encouraged to present additional ex-post risk measures, and will be required to describe the risk measure and its relevance to the strategy.

Adequacy of Risk Description within Composite Definitions 

While GIPS Standard 4.A.3 related to defining composites does not explicitly require firms to disclose qualitative information about risk, firms must include any significant features about an investment strategy to help prospective investors make informed decisions.

Prior to the proposed Guidance Statement on Risk, there was little guidance within the standards on how firms should address risk within composite descriptions. The newly-proposed Guidance Statement will require firms to assess the impact and significance of risk as it relates to a composite’s investment mandate, objective, and strategy. Firms will need to assess strategy features including, but not limited to, investment concentration, correlation of returns, changes in liquidity, exposure to counterparty creditworthiness risk, and the ability to employ significant leverage in portfolio. The nature and significance of risk features within a composite will drive the complexity of the risk description disclosure within the composite definition.

Your Opinion Matters

Like all new GIPS pronouncements, the proposed Guidance Statement on Risk will be open for public comment until September 26, 2017. We encourage all firms to weigh in on the guidance statement as all will be subject to the provisions on risk and the adequacy of risk disclosures. The draft of the guidance statement can be found here: https://www.gipsstandards.org/standards/Documents/Guidance/exposure_draft_public_comment_risk.pdf.

We would be pleased to provide further information related to this subject. For more information, contact Thomas A. Peters, Director, Audit & Accounting at tpeters@kmco.com or Joshua E. Kramer, Senior Accountant, Audit & Accounting at jkramer@kmco.com

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