In our last blog, Olivier Lebleu, Senior Director of Institutional Relations, EMEA and Iain McAra, Director, Global Investment Performance Standards, EMEA at CFA Institute discussed the benefits of the updated 2020 GIPS® standards for alternatives managers and capital allocators. In this blog, they focus on the potential pitfalls of not adopting the standards.
We also discuss how Allocator, in partnership with CFA Institute for an upcoming webinar on the 3rd of December on the GIPS® standards, enables faster, standardized reporting through integrated data management, analytics and workflow solutions.
Here are, according to Olivier Lebleu and Iain McAra, the three potential pitfalls that firms not complying with the 2020 GIPS® standards are exposing themselves to.
1. Reputational risk and a loss of trust
According to Iain McAra, if a firm isn’t following a set of standardized procedures to show the performance of its products, it’s going to be subjecting itself to the potential for considerable reputational risk.
For instance, if a manager uses a calculation methodology for prospective clients, and then uses a different performance calculation methodology for existing clients when the prospect becomes a client it could lead to an erosion of trust between both parties.
What’s more, is, there’s going to be confusion among investors if they are presented with a plethora of information that isn’t comparable or consistent. This has implications for the perceived professionalism of the industry and, again, the level of trust among investors.
2. Suboptimal business-level risk control
McAra also believes that the policies and procedures that the 2020 GIPS® standards involve can play an essential role across all parts of a business – not just in terms of performance calculation. Firms can’t just claim GIPS® compliance. They have to follow an underlying framework that also helps with areas such as internal audit, risk management, business continuity and business recovery. Being able to manage and shift internal responsibilities around these areas have been absolutely key to adjusting to the new normal of remote working during the lockdown.
So while the GIPS® standards are concerned with performance calculation, the infrastructure it requires can play an important role in firm-wide risk control. Without this kind of robust infrastructure in place, organizations might be exposing themselves to more risk.
3. Losing clients to GIPS® compliant managers
In a world where many asset owners and LPs are consolidating their manager and GP relationships, GIPS® compliance is an easy shortcut. It helps them screen the universe of GPs and managers willing and able to endorse performance reporting best practice.
In short, complying with the GIPS® standards could make alternatives managers stand out from the crowd, while not doing so could have a significant impact on their ability to gather assets. In a fiercely competitive market in which investors are becoming increasingly demanding, adopting the GIPS® standards represents a relatively easy way for alternatives managers to sustain or even boost their market share.
Olivier Lebleu added that institutional prospects will only be reassured by the GIPS®standards, the gold standard for performance measurement – appearing in the due diligence process. So, if firms don’t comply with the 2020 GIPS® standards that are now easier to adopt than before, investors are going to wonder if a firm has something to hide.
4. How can Allocator help investors?
The GIPS® standards are all about providing investors with transparent, consistent and comparable investment returns data – essentially, they make comparability of manager data easier for investors. That’s exactly what we strive for at Allocator, which is why we’re honoured to be working with CFA Institute to promote the latest update to the GIPS® standards.
How exactly does Allocator make investors’ lives easier? Thousands of funds regularly report data and documents to their clients via Allocator. We create a time series for every number so that investors can easily track changes and analyze their investment data over time. What’s more, our platform converts different data sources into a single, easy-to-analyze format – in line with the GIPS® standards principles of transparency, consistency and comparability. And there’s one central repository for fund documents allowing investors to re-verify and analyze manager reported data from its source. This means that the information accessed is always up to date, secure and organized.
When it comes to performance data, Allocator alerts investors through its platform of any differences in reported returns. Once Allocators analysts have verified the source and methodology being applied, the data is then made available to clients through our platform. We also point out the methodologies that managers are using to calculate performance so that investors have all of the information they need to make informed decisions. In addition, we will also be adding GIPS® compliant data points to our database in the future to allow investors to screen for and identify managers that are compliant.
To find out more about the 2020 GIPS® standards and how investors can benefit from the recent revision to the standards, register for our webinar in partnership with CFA Institute on the 3rd of December 2020 HERE.