Many investment management firms tout that they are global investment Compliant. So what is global investment, and why would a firm voluntarily choose to comply with the global investment standards? These are some of the questions we'll answer in this brief overview of the (GIPS) that are promulgated by the Investment Performance Council of the CFA Institute.

The investment management industry is becoming more global. Many asset managers not only compete for business in their home markets, but in foreign markets as well. The North American and Western European markets are very well developed, but other markets are catching up and becoming more sophisticated as well. For investment firms outside the U.S. or European Union, being global investment compliant can provide legitimacy and give investors confidence that the firm strives to meet the highest standards. 

Being global investment compliant can actually make things easier for firms that are trying to compete in multiple markets, because they only have to abide by one set of standards and they can avoid having to make major changes in their presentation or calculation methods when working in other countries. In other words, GIPS fill a need for standardization across a far-flung industry.

GIPS are standards, not laws. Firms do not have to be GIPS compliant. Furthermore, these standards are not codified into U.S. securities law. However, although they are voluntary, they provide discipline to the calculation and confidence in the performance represented.

Before performance is calculated and presented, there is some groundwork for the firm to do. The first thing a firm must do is actually define the firm. This may sound very obvious, but there might be legitimate reasons that a subsidiary would be excluded from a firm definition.

One of the most important things a firm can do is to define its composites in a logical and meaningful way. GIPS require that all of a firm's discretionary, fee-paying portfolios be included in at least one composite.

The provisions of the standards cover several other items including calculation, as well as presentations and disclosures.

Fair Representation of Historical Performance
One of the stated objectives of GIPS deals with ensuring accurate and consistent investment performance. The standards require firms to initially show a minimum of five years of GIPS compliant history. After this minimum, the firm must build up to a track record of 10 years. If the composite has been in existence for fewer than five years, the firm must show the entire history since inception.

For example, an investment that may look great if a firm only shows the last two years, in which the investment experienced positive returns. However, suppose that the three years prior to this, the firm experienced negative returns; if the firm did not reveal the investment's earlier performance, investors would get a completely different impression of the firm's asset-management abilities. Having a consistent standard helps investors make more informed choices and may increase their confidence in the investment management industry.






Firms that claim compliance with GIPS can have themselves independently verified by a third party. Verification is voluntary at this point, but many firms choose to be verified to help themselves identify gaps in their procedures, and to give clients peace of mind. There are firms that specialize in this type of verification and performance measurement consulting. Once a firm has been verified, it may add a disclosure stating such in its GIPS-compliant marketing materials.