Client Demand and Regulation are Driving Trends Behind OCIOs Claiming GIPS Compliance

The rate of Outsourced Chief Investment Officer ("OCIO") firms claiming compliance with the Global Investment Performance Standards (GIPS^®) continues to rise. Today, 38% of the top 50 OCIO firms by AUM claim compliance¹. That is an 8% increase from 2020 to 2021 and the percentage is expected to grow by at least 10% from 2021 to 2022. In this article, we look at the two main drivers behind OCIO firms ramping up quickly to claim compliance with GIPS. 

1. GIPS compliance questions in requests for proposals 

The requirements set forth by public entities and private investors seeking their services in Requests for Proposals (“RFPs”) has been one of the main drivers for OCIOs claiming GIPS compliance. We have seen an increase in questions relating to GIPS across all asset classes as noted in the Q1 2021 GIPS compliance Mandate Update Blog in May 2021. Below are some of the questions and requests asked in recent public RFPs specifically in the OCIO space:

Issuer	Date	Mandate Size (USD)	GIPS Compliance
Municipal Finance Authority of BC	5/2/2021	$300M CAD	The Proponent firm must be an UN PRI Signatory and fully comply to the Global Investment  Performance Standards (GIPS).
Firemen's Annuity & Benefit Fund of Chicago	1/20/2021	$918 (Diversified)	Discuss the timing of reliable performance data and report availability. Are GIPS performance presentation standards employed? If not, why not? Is information available online?
Water and Power Employees' Retirement Plan	9/8/2020	~$1,100 (Real Estate)	Adhere to GIPS-compliant reporting and performance measurement standards and comply with generally accepted accounting principles (“GAAP”) applied on a fair market value basis.
City and County of San Francisco Employees' Retirement System	8/12/2020	~$5,600 (Private Credit) ~$1,300 (Private Equity)	The firm must comply with the "Duties of the Investment Managers" outlined herein and conform to CFA Institute/Global Investment Performance Standards for performance reporting.
Rowan University	2/27/2020	Unknown (alternatives portfolio)	Is your firm GIPS compliant?

While this small sample only represents a few of the public entities, there are many private investors issuing RFPs as well.

Third-party examiners (“TPEs”) are also sending out many of these RFPs on behalf of the asset owners that they represent. For better comparison across OCIOs, TPEs are requesting that performance be shown in a more uniform manner. The primary method for achieving uniformity is to show composite performance. The GIPS standards offer a level of consistency in calculation of performance while providing a sufficient amount of flexibility in the creation of a composite. It is no surprise the GIPS standards continue to become more and more relevant in the OCIO space. It’s important for firms to be considerate around the composite constructed so that the performance is meaningful.

2. New SEC Marketing Rule

The second driver is the new SEC Marketing Rule and the impact it will have on how OCIO firms present performance. 

1. Representative Performance: While representative account performance has historically been an important reporting option, new requirements may require a re-assessment. The new Marketing Rule allows for the presentation of representative account performance, but the firm must prove that the performance is not materially higher than the performance of all “related portfolios.” Related portfolios consist of all similar accounts invested in the same mandate.  In order to document and assess that representative account performance is not materially higher, many firms will need to create and maintain composites. It is important to note that the GIPS standards are mentioned multiple times in the Marketing Rule, and it appears that composite-based reporting is the preference. Firms that go through the exercise of creating composites will be practically in position to claim GIPS compliance.  
2. Net Returns and Gross Performance: The New Marketing Rule also requires net returns to be shown when gross performance is shown. Gross performance is defined to mean the performance results of a portfolio before the deduction of all fees and expenses that a client or investor has paid or would have paid in connection with the investment adviser’s investment advisory services to the relevant portfolio. Net performance is defined as the performance results of a portfolio after the deduction of all fees and expenses that a client or investor has paid or would have paid in connection with the investment adviser’s investment advisory services to the relevant portfolio. Net performance may exclude custodian fees paid to a bank or other third-party organization for safekeeping funds and securities. To the extent that these fees are paid to the adviser rather than a third party, custodian fees may need to be considered in net performance. This is in line with the GIPS definition of both gross and net performance.
3. Disclosures: The rule does not prescribe disclosure requirements for the presentation of net and gross performance but provides some general prohibitions. The rule states that disclosure may include:
   1. the material conditions, objectives, and investment strategies used to obtain the results portrayed; 
   2. whether and to what extent the results portrayed reflect the reinvestment of dividends and other earnings; 
   3. the effect of material market or economic conditions on the results portrayed; 
   4. the possibility of loss; and 
   5. the material facts relevant to any comparison made to the results of an index or other benchmark.   

Firms should always consider if the advertisement is fair and balanced when presenting performance information. These considerations align with the GIPS disclosure requirements.

How we help

Many OCIO Firms are finding the need to create composites to meet both the requests of RFPs and the requirements of the Marketing Rule. If firms already have composites and use a time-weighted return (“TWR") methodology to calculate account performance, there are just a few more action items before the firm can claim GIPS compliance.  

1. Policies and Procedures: A document outlining how the firm complies with each provision of the GIPS standards.
2. Definition of Discretion for the firm: Determine the level at which the OCIO firm can implement the intended strategy. All discretionary fee-paying accounts must be included in at least one composite.
3. Marketing: Create and provide GIPS Reports to all prospective clients (including RFPs) for the marketed composites.

We are the verifier for 68% of the top 50 OCIO Firms by AUM. We provide templates and customized consulting for firms coming into compliance for the first time and can provide a GIPS GAP Analysis, which outlines any issues with the way the firm is currently structured and what adjustments will need to be made to comply with the GIPS standards.   

For more information

Contact us with any questions or to discuss how we can assist your firm with claiming GIPS compliance or addressing the changes required by the new Marketing Rule.

Contact Us
 

Looking ahead

We have learned from CFA Institute that they are working on guidance to assist OCIO firms with the GIPS standards in the US. These standards are in the very early days and will be following the typical release other new standards undergo (including a public comment period). We will provide further guidance as we are made aware. Claiming compliance with the GIPS standards today will help OCIO firms prepare for the new guidance that will be released in the coming years.

Additional resources

• Marketing Rule Insights
• ACA's Guide to Performance Under the New Marketing Rule
• The Value of GIPS Compliance: 2020 OCIO Survey Results
• OCIOs look to the GIPS standards to provide greater performance transparency

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.   

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¹Source: https://compliancetracking.cfainstitute.org/gips-firm-list#disclaimer
https://www.mercer.us/content/dam/mercer/attachments/north-america/us/us-2020-ocio-survey-reprint.pdf
https://www.cortexconsulting.com/ocio-directory