GIPS^® Compliance, Marathons & Significant Events

A GIPS Disclosure Analogy

I’ve been helping firms become GIPS compliant and have been running marathons for over 20 years, and last month, I just ran my fastest half marathon ever.  The marathon was an inaugural Mt. Hood Revel run, and my husband was getting texts during the event tracking my bib number:

“One quarter done with a pace of 8:05 min/mile. Projected finish time of 3:33:26.41 at 9:05AM.”

Wow, that was fast (for me!). Then, came the second text, and my husband really started getting excited: “Hooray for Kim Cash who just reached mile 13.1 into the marathon in 1:46:43.20! Half way done with a 8:08 min/mile pace. Projected finish….”

I didn’t finish in 3-1/2 hours, but my husband had the right bib number. The experience underscores a few key tenants of the spirit of fair and full disclosure we know as the GIPS standards, best practices for investment performance presentations:

·        No annualizing periods less than a year: my projected finish time at the quarter and half was over an hour off my actual finish (overstating my pace by 30+ %).

·        Annual time periods: I ran a half marathon in less than an hour and 47 minutes, which is not false or misleading on its face… but, I was running a marathon, so it would be totally misleading for me to just talk about my half pace and not mention that I finished the full race in 4:43:15.15.

·        Must disclose significant events: And here’s the real gem: the race drops 3,861 ft in elevation during the first half (and only another 800+ ft the second half).

source: Runrevel.com/rmh

Every GIPS compliant firm knows – and investors should know – that annualized returns of less than one year are misleading. Presentations can’t take one great quarter of performance, multiply(compound) it by 4, and use that number as a projection of what investors could earn in a year.  When comparing the performance of different investment providers, having full annual calendar year performance side-by-side is something every GIPS-compliant firm is required to provide. It’s helpful for investors to review the entire performance history year-by-year over different market cycles to assess manager skill versus a cherry-picked best performance period.  GIPS-compliant firms are also required to provide other useful disclosures–usually on a single performance page–that could be helpful if explained, and investors shouldn’t think twice about asking a prospective manager for an explanation.

Then there’s the requirement to report all significant events that would help a prospective client interpret the investment performance. It isn’t an easy checklist disclosure. It’s where the GIPS standards become–more than just rules–ethics to do business by. It also requires ongoing conversations between portfolio managers and the people preparing the performance presentations.

Running down from Mt. Hood, dropping over 4600 feet in elevation by the finish line, was a trip. I loved the really fast first half of this event and telling people I ran a 1:46 half. I also have to tell them the rest of the story, that it was downhill all the way, and that I ran my usual 4’40”. It would be silly not to, even though their kids’ college education and retirement income isn’t in the mix. People want to invest with firms who want to share the whole story. That’s what GIPS compliance is, and it is a marathon.

Thinking about compliance? Contact kim.cash@cascadecompliance.com with any questions about GIPS and significant events, full disclosure and the benefits to promoting integrity in the financial markets. Better yet, attend the GIPS conference in Austin, TX next month. Find out more: CFA Institute GIPS Conference

If you’re not a finance person, and you’re still reading this article: WOW! Your take-away: ask your financial advisor if they are a GIPS-compliant firm or if they invest with GIPS-compliant firms and, if yes, ask for their GIPS compliant performance presentation. If they are not GIPS-compliant, ask why not?