The Exposure Draft of GIPS Standards Guidance Statement on Overlay Strategies

Last summer, CFA Institute released the Exposure Draft of the GIPS^® Standards Guidance Statement on Overlay Strategies. Historically, this segment of the investment industry has not received much in the form of ethical best practices in calculating and presenting performance, and this release was the first attempt by CFA Institute to issue official guidance for overlay managers. With the release of this exposure draft, many firms now face the possibility of having to change how performance is calculated, how performance is marketed, and how total assets under management is tallied.

The public comment period ended on 27 November 2017 and the GIPS Standards Technical Committee will now review and address the responses. Over 20 different organizations submitted letters, many of which expressed concerns over the prescribed calculation methodologies. Below are a few of the key points of the guidance statement that should be of interest to overlay managers:

• Assets managed via an overlay strategy will be required to be presented separately from assets managed through more traditional means.
• Assets managed via an overlay strategy must be calculated based on one of the following methods:
  • The value of the underlying assets being overlaid.
  • The notional value of the overlay.
  • The target exposure provided by the account owner.
• The asset values of portfolios included in the same composite must be calculated using a singular methodology. This means that a portfolio that has historically been valued based upon the target exposure would not be allowed to be in the same composite as an account valued using the actual notional value of its investments. 
• When calculating performance for overlay portfolios, the denominator must be calculated using the same approach that was used to determine the value of the portfolio.  
• Income derived by collateral would be required to be included in the performance calculation if the collateral is managed by the investment firm. 
• Multi-period performance for overlay portfolios with a floating notional exposure would be required to be calculated by geometrically linking the sub-period performance.
• Multi-period performance for overlay portfolios with a fixed notional exposure would be required to be calculated by arithmetically linking the sub-period performance. 

The proposed effective date of this guidance is 1 January 2019. We look forward to seeing what changes the Technical Committee acknowledges and implements.

About the Author

Travis Morgan, CFA, CIPM, is a managing director with ACA Performance Services, a division of ACA Compliance Group. His primary responsibilities include overseeing GIPS compliance verifications and other performance-attestation engagements. Travis works from ACA’s Jacksonville, Oregon office. His client base includes firms across the US. These vary across many different asset classes and types, which gives him diverse experience in helping companies of all shapes and sizes come into compliance. Travis holds the Chartered Financial Analyst (CFA) designation. He also holds the Certificate in Investment Performance Measurement (CIPM) from the CFA and is a member of the CFA Society of Los Angeles.