For firms electing to update reports with 2019 performance, the season for making required changes is upon us. What is really changing to the GIPS compliant presentation besides now referring to them as GIPS Reports?
Most significantly, there are now four compliant presentations, and each report has its own chapter in the 2020 edition of the GIPS standards. For firms already including limited pooled funds in composites, you can weigh the pros and cons of pooled fund versus Composite Reports in our article “Bridging the Fund vs Composite Divide” .
For firms sticking with Composite Reports, the overall changes that apply to every firm are minimal and summarized in A through F below.
A. Inception dates are now required on all GIPS Reports
The composite inception date is now required to be disclosed in, addition to the creation date of the composite, which should lead to more clarity on how each is defined. The composite inception date is the performance start date of a composite, which after 10 years may roll off performance charts and not necessarily be self-evident. The composite creation date is the date in which a firm decides to group similarly managed accounts together to create a composite, a date that is not readily transparent without disclosure. Sometimes these two dates are the same and sometimes these dates are very different. For pooled funds, similarly managed accounts are comingled at inception of the fund, so composite creation is not a required disclosure on a GIPS Pooled Fund Report. If the two dates are the same for a composite, here’s suggested language for a firm’s disclosure update: “The composite inception and creation date is January 1, 2018.” If the two dates are different, suggested language could read: “The composite creation date is August 1, 2019, and the composite inception date is January 1, 2018.”
B. Compliance statement changes
The first paragraph of the compliance statement remains unchanged, but the second paragraph has significant changes to include disclosure of what compliance means for the firm and an enhanced description of what it means for a firm to be verified. Similar to the 2010 edition of the GIPS Standards, firms will continue to choose from three different compliance statements, depending on whether or not the firm has received a verification or performance examination on a particular strategy.
C. More details for the 3-year ex-post standard deviation
The GIPS standards now require firms to disclose if they use gross or net returns to calculate the 3-year ex-post standard deviation.
D. Registered trademark disclosure needs to be added
The registered trademark disclosure must be presented word-for-word on all GIPS Reports:
“GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.”
E. Composite assets as a percentage of total firm assets
Firms are now required to present total firm assets. If a compliant firm has been presenting composite assets as a percentage of total firm assets instead of total firm assets, the firm will have to add to or replace the percent of total firm assets with total firm assets.
F. Additional requirement for pooled funds within composites
- Expense ratio: If a pooled fund is included in a composite and the firm is showing the GIPS Composite Report to a prospective investor of the fund, then the firm must disclose the fee schedule for the fund and the fund’s expense ratio.
- Disclosure that the list of pooled fund descriptions are available upon request.
The current required disclosure is “A list of composite descriptions is available upon request.” Now that firms must maintain a list of limited distribution pooled fund (LDPF) descriptions and a list of broad distribution pooled funds(BDPF), firms need to disclose in some way, “A list of composite and limited distribution pooled funds descriptions, and a list of broad distribution pooled funds is available upon request.”
Note: descriptions are required for composites and limited distribution pooled funds but not for broad distribution pooled funds.
In Appendix A of the 2020 GIPS Standards for Firms, Sample GIPS Reports provide seven different examples of disclosure wording if the firm has both composites and pooled funds of some kind.
For a firm that has both composites and limited distribution pooled funds (No BDPFs, or an election to include descriptions of BDPFs)
- A list of composite and pooled fund descriptions is available upon request.
- A list of composite and limited distribution pooled fund descriptions is available upon request.
For a firm that has both composites and broad distribution pooled funds (No LDPFs)
- A list of composite descriptions and a list of broad distribution pooled funds are available upon request.
For a firm that has composites, limited distribution pooled funds and broad distribution pooled funds
- A list including composite descriptions, pooled fund descriptions for limited distribution pooled funds, and broad distribution funds is available upon request.
- Also available are the List of Composite Descriptions, the List of Pooled Fund Descriptions for Limited Distribution Pooled Funds, and the List of Broad Distribution Pooled Funds.
- Lists of composite descriptions, limited distribution pooled fund descriptions, and broad distribution pooled funds are available upon request.
- A list of composite and limited distribution pooled fund descriptions, as well as a list of broad distribution pooled funds, are available on request.
For firms that do not have composites, you can leave out “composite descriptions” from any of the examples above depending on the specific mix of LDPFs or BDPFs.
Additional presentation and disclosure changes may apply to your firm/composite strategies, for example, if you show custom benchmarks, model performance or charge your clients with research costs.
Even with a scan for situation-specific disclosure updates, changes to the GIPS Composite Reports for firms that aren’t changing how they calculate or construct composites are not as intimidating as the total rewrite of the GIPS standards may make them seem.
Please contact us with questions or to request comprehensive, easy-to-use checklists comparing 2010 and 2020 disclosures and checklists comparing Composite and Pooled fund disclosures. Contact information: Kim Cash, firstname.lastname@example.org or Janice Kitzman, email@example.com.