The 2020 GIPS® Standards: Expanding Adoption for Alternatives Managers & Capital Allocators

Alternatives managers haven’t always been open to embracing the GIPS® standards, but that could be set to change with the  2020 update. For the first part of a two-part blog, we spoke to Iain McAra, Director, Global Investment Performance Standards, EMEA and Olivier Lebleu, CFA, Senior Director of Institutional Relations, EMEA from CFA Institute, to understand the benefits of the newly revised standards for alternatives managers and capital allocators.

What are the GIPS® standards?

The globally adopted, GIPS® standards are a set of standardised, industry-wide ethical principles that guide investment managers and asset owners on how to fairly calculate and present their investment results, to promote transparency, consistency and comparability of investment returns. Based on the principles of fair representation and full disclosure of performance, the aim is to serve investors’ interests and instil confidence among investors in the products that they’re buying.

Why are the standards so important for Alternatives Managers?

There are a multitude of factors that can affect the calculated returns of alternatives portfolios. If the methodology is not standardized, investors can’t compare returns between managers. Even worse, figures could be misleading. As investors demand higher levels of transparency, consistency and comparability of investment returns reported by their managers, the adoption of the revised 2020 GIPS® standards provides a robust framework for implementing stringent policies and procedures in fair and accurate performance representation.

Adopting GIPS® compliance has some significant benefits for asset managers too. With the alternative investments industry becoming a widely adopted source of uncorrelated returns to traditional asset classes, compliance with the GIPS® standards makes alternatives managers more attractive for inclusion into highly scrutinized portfolios. And with more and more investors requiring their managers to comply with the GIPS® standards, it could be vital to the ongoing success of the growth of the alternative investment we have seen in recent times.

What’s changed in the 2020 GIPS® Standards?

Speaking to Ian McAra and Oliver Lebleau directly, they explained there were three main changes in the 2020 update from the previous large-scale revision in 2010.

“We’ve separated specific requirements for asset managers and asset owners. Asset managers need to follow more stringent guidelines because they’re trying to sell their capabilities, while asset owners focus on internal reporting” Ian McAra explained.

The next two changes have significant consequences for alternatives managers.

Olivier Lebleu added that “We’ve broadened the range of scenarios in which firms can present money-weighted series of returns. Previously we only allowed money-weighted returns for private equity and real estate, but we’ve since realised that it’s appropriate for a broader range of asset classes if certain criteria are met and other financial ratios provided. We now permit money-weighted returns if a strategy involves illiquid investments, has a fixed life, is closed-ended, and / or is commitment-based.”

Lebleu continued “We’re also providing specific provisions for the reporting of pooled funds. Previously, we asked asset managers to group all similarly-managed portfolios, including pooled funds, into what we call composites so that investors have a good overview of a strategy’s overall performance. That’s fine for investors looking to allocate to segregated mandates, but for those looking to invest in a pooled fund the track record of the fund itself, not a composite, is what they need to know.”

Why is the 2020 update good news for alternatives managers and capital allocators?

According to McAra, the revised standards have removed some of the barriers for firms that wish to show that they report their performance according to ethical best practices.

“We’ve seen that standardisation is needed in the alternatives space. Before the 2020 update, we acknowledge that we hadn’t pitched it quite right, so we reached out to the industry for their views. We didn’t want to set a hurdle level so low that it didn’t add value for investors, or one so high that it wasn’t achievable for practitioners. We believe that with the 2020 updates we’ve struck the right balance.”

Before the 2020 update, if you were an alternatives manager and you only ran one strategy in a pooled format, it wasn’t easy to claim GIPS® compliance, due to the way composite construction was insisted on. As per this update though, it is much less arduous for alternatives managers to adopt the GIPS® standards.

To find out more about the 2020 GIPS® standards and how you could benefit from the recent revision to the standards, register for our webinar HERE in partnership with  CFA Institute on the 3rd of December 2020.