Asset managers and investors to benefit from post recession GIPS evolution

Key changes to the Global Investment Performance Standards (GIPS) aim to restore investor confidence in the wake of the global financial downturn.

The changes, which could significantly impact operating policies and system, will be introduced on 1 January 2011, providing adequate time for asset managers to incorporate them.

Since 2005, the GIPS required asset managers to voluntarily provide standardised and transparent measures of their performance. Adherence helps establish a more consistent set of procedures for calculation and reporting of performance.

“The initial purpose of the GIPS was to allow investors to make meaningful comparisons in and across geographical areas, enable asset managers to compete internationally and attract assets from institutional investors who often have high standards of transparency and disclosure,” says Pierre de Villiers Asset Management Leader at PwC.

The new standards enable asset managers to supply independent, third-party assurance of their financial performance and help rebuild investor confidence. While the standard contains multiple changes the following amendments are expected to make the most significant impact:

Fair value: The GIPS reflect greater sensitivity to questions around how to value assets, particularly less liquid assets and distressed investments suffering from financial crisis events. The recommended usage of a valuation hierarchy when no market value is available has been included.

Investment risk: Asset managers need to provide information appropriate to the risk profile. A new measure of the total investment risk (volatility) has been introduced.

Disclosure of benchmarks: Composite benchmark descriptions and component weightings must be disclosed. For composite benchmarks, based on the benchmarks of underlying portfolios, changes in the benchmark composition due to changes of the composite constituents do not have to be disclosed.

Withholding taxes: The current disclosure regarding the treatment of withholding taxes on income and gains has been revised. This is only required if investments subject to withholding taxes are material to the composite. The current requirement for disclosure of the tax basis for net dividend benchmark indices has been removed.

Portability criteria: A clarification explicitly indicates that portability tests related to corporate acquisitions must be met on a composite-specific basis. The current portability criteria have been modified so that the decision-making process remains intact and independent within the new firm.

“In South Africa a large number of traditional asset managers have complied with the GIPS. Managers of alternative investments, including hedge funds, private equity funds and real estate funds, are increasingly exploring compliance with the standards,” says de Villiers.

For alternative managers, the added transparency, credibility and validation brought on by the claim of GIPS compliance can help them keep up with best practice, reinforce investor trust and create new relationships with prospective clients.