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Going Beyond GIPS®

Originally Published: December 21, 2011, Phocion Investments; July 21, 2015, "NYSSA's The Finance Professionals’ Post"

Global Investment Performance Standards, better known as GIPS®, are a voluntary set of standards established to create transparency in the calculation and presentation of performance. From improving the credibility of compliant investment firms to providing clients the ability to fairly evaluate the performance of these firms, GIPS® has arguably become the gold standard in investment performance. As client awareness has risen, demand for GIPS® is pushing investment firms in becoming compliant in order to maintain their competitiveness. While this is a positive in an industry that sorely needs standards that encourage fairness and credibility, it would be short sighted for firms to stop at GIPS® when it comes to their performance. We must remember that performance is not a part of GIPS® but rather it is GIPS® that is a part of performance. Meaning that, in the ever growing field of investment performance, stopping at GIPS® would rob a firm of maximizing the benefits of performance that go beyond GIPS®.

Performance Is More than GIPS®

The Global Investment Performance Standards are standardizing performance reporting and bringing a greater level of transparency to investment firms’ greatest marketing tool, performance. GIPS® have become a business in and unto itself with practitioners ranging from the large accounting and consulting firms to individual GIPS® specialists. The current focus on compliance is important and should be encouraged but what is sorely lacking is a move towards establishing performance analysis as a key factor in evaluating the effectiveness of strategies, managers and firms alike.

Establishing performance teams dedicated to analyzing the performance of the firm, its strategies and its managers is the highest level of quality an investment firm can attain in this field. Distancing oneself from the short-sighted view of performance as only an operational function with the sole tasks of administrating the systems, reporting, and GIPS® related functions is the kind of mindset that is required to turn performance from a cost center to a profit generator. Allowing all performance feedback to come from the portfolio managers and CIOs, whose independence and performance knowledge is sorely lacking, will cost firms the opportunity to improve on inefficiencies that only an objective performance specialist can provide. Performance has progressed exponentially over the past 20 years such that portfolio managers and CIOs lack the time and expertise to properly and effectively analyze performance.

A Lesson from the Sports World

A good analogy of the state of performance in many firms is professional team sports. Whether it is baseball, football, soccer or my beloved hockey, at one time there was either one or a couple of coaches involved in managing a team. In hockey for example, the sole responsibility for evaluating the team’s strategy and player performance belonged to the head coach. Considering that the strategy was his design and that his viewpoint of the game was limited to standing behind the bench, most of the available information to maximize feedback was not being processed nor analyzed. As competition increased and new tools were developed, that old mindset quickly disappeared. The game evolved to where it now employs assistant coaches (position specific), video analysts, specialized trainers and sports psychologists. Each person has the responsibility of gathering as much information as possible and providing the analysis/feedback that the head coach can use to effectively evaluate his strategy and players. Investment firms have not been as quick to adopt such an approach with respect to performance and are lagging considerably to maximizing the benefits that this field has to offer.

Final Words

As an investor and a professional, I find the progression of GIPS® as a major step towards improving the performance functions in the investment industry. This progression should not stop at GIPS® and investment firms worldwide have far more to gain by taking performance from an operational task to an analytical one, where it transitions from a cost center to profit generator. Effective evaluation of strategies and managers provides the invaluable feedback that is key to facilitating firms in outperforming. If specialization had no value, then the game of hockey would still have a fedora wearing coach solitarily standing behind a bench.

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