With the 2020 edition of the Global Investment Performance Standards (GIPS®), firms are now able to present pooled fund specific performance. The changes pertaining to pooled funds were made to better accommodate the marketing of pooled funds. The hope is that more firms that manage pooled funds will choose to comply with the GIPS standards as a result of this expansion to present pooled fund specific performance.
Summarized below are the areas of the new GIPS standards that address pooled funds.
A broad distribution pooled fund is defined as a pooled fund that is regulated under a framework that would permit the general public to purchase or hold the pooled fund’s shares and is not exclusively offered in one-on-one presentations.
A limited distribution pooled fund is any pooled fund that is not a broad distribution pooled fund.
A composite is an aggregation of one or more portfolios that are managed according to a similar investment mandate, objective, or strategy. Firms must create composites for all strategies that are managed for segregated accounts or offered as a segregated account. A segregated account is a portfolio owned by a single client. All actual, fee-paying, discretionary pooled funds must be included in any composite for which they meet the composite definition. A pooled fund can be the only portfolio in a composite or can be included in a composite with other portfolios.
However, firms are not required to create composites that include only one or more pooled funds if the strategy of the fund(s) is not offered as a composite strategy to segregated accounts. In addition, firms may terminate composites that were created to include only one or more pooled funds when the firm does not offer the pooled fund strategy as a composite strategy. This may be helpful for firms that created composites for broad distribution pooled funds with strategies that are only offered through the fund and not as a segregated account, allowing the firm to terminate these composites and gain operational efficiencies.
Pooled Fund Lists
Under the 2010 edition of the GIPS standards, firms were required to provide the List of Composite Descriptions (for all composites) upon request and to include terminated composites on this list for at least five years. Under the 2020 edition, firms are required to maintain the following lists:
- A complete list of composite descriptions
- A complete list of pooled fund descriptions for limited distribution pooled funds
- A complete list (without descriptions) of broad distribution pooled funds
Firms can maintain these lists separately or combine them on one list.
A composite description is general information regarding the investment mandate, objective, or strategy of the composite and must include all key features of the composite.
A pooled fund description is general information regarding the investment mandate, objective, or strategy of the pooled fund and must include enough information to allow a prospective investor to understand the key characteristics of the pooled fund’s investment mandate, objective, or strategy.
For both the composite and pooled fund description, key characteristics must include:
- The material risks of the composite’s strategy
- How leverage, derivatives, and short positions may be used, if they are a material part of the strategy
- If illiquid investments are a material part of the strategy
Firms must provide:
- The complete list of composite descriptions to any prospective client that makes such a request.
- The complete list of pooled fund descriptions for limited distribution pooled funds to any limited distribution pooled fund prospective investor that makes such a request.
- This list may be tailored to the prospect, but it is not required to be tailored (e.g. a list may include only the limited distribution pooled funds for which the prospective investor is eligible).
- Because firms must first comply with local laws and regulations, a firm is not required to include on this list any pooled fund that the firm is prohibited from marketing.
- The complete list of broad distribution pooled funds to any broad distribution pooled fund prospective investor that makes such a request.
- This list includes only the pooled fund’s name and does not include pooled fund descriptions.
- If the firm’s website includes all broad distribution pooled funds, the firm may instead direct the prospective investor to the website.
Firms must provide the pooled fund description for any broad distribution pooled fund to any broad distribution pooled fund prospective investor that makes such a request.
The list of composite descriptions must include composites that terminated within the last five years. However, firms are not required to include terminated pooled funds on the list of limited distribution pooled funds descriptions or the list of broad distribution pooled funds. This is because once a fund is closed, the fund is no longer available for investment and cannot be offered to a prospective investor.
GIPS Pooled Fund Reports
A GIPS Report must be distributed to all limited distribution pooled fund prospective investors when they initially become a prospective investor. The GIPS Report may be either:
- A GIPS Pooled Fund Report for the respective limited distribution pooled fund, or
- A GIPS Composite Report. A GIPS Composite Report may be provided only if the limited distribution pooled fund is included in the respective composite
Firms are not obligated to provide a GIPS Pooled Fund Report for the respective limited distribution pooled fund if the limited distribution pooled fund is included in a composite. Firms may provide a GIPS Pooled Fund Report to broad distribution pooled fund prospective investor but are not required to do so.
Returns Presented in a GIPS Pooled Fund Report
Firms may present either gross returns or net returns (or both) in a GIPS Pooled Fund Report. Firms must also present the pooled fund’s expense ratio that is appropriate to prospective investors. The intent of disclosing the expense ratio is to inform potential investors of the expenses they will incur if they participate in the pooled fund. Allowing firms the ability to choose to present either gross or net returns will allow firms to present returns customary to the requirements and practices of the region in which they market.
In response to industry demand and assertions that since-inception internal rates of return (SI-IRR) are more appropriate than time-weighted returns for many strategies, including many pooled funds, the use of SI-IRRs was expanded within the 2020 edition of the GIPS Standards. The 2020 provisions replace the term internal rate of return with money-weighted return and do not specify a specific method for calculating money-weighted returns. A money-weighted return is defined as a return for a period that reflects the change in value and the timing and size of external cash flows. The following conditions must be met for firms to be able to present money-weighted returns for a pooled fund instead of time-weighted returns:
- The firm has control over the external cash flows and
- The pooled fund has at least one of the following characteristics:
- It is closed-end
- It has a fixed life
- It has a fixed commitment
- A significant part of the investment strategy is illiquid investments
Please see our Flash Report: 2020 GIPS Standards Expand Ability to Use Money-Weighted Returns for more information.
Track Record for a New Limited Distribution Pooled Fund
The 2020 edition of the GIPS standards include a new recommendation that provides firms with an option when selling participation in a new limited distribution pooled fund that does not have a track record to present to a prospective investor. Under these circumstances, firms should instead present the most appropriate track record for the new limited distribution pooled fund, if one is available. The most appropriate track record may be a GIPS Report for a composite or another pooled fund that is managed in a similar strategy.
GIPS Advertising Guidelines
The 2010 edition of the GIPS Standards includes Advertising Guidelines only for composites. The 2020 edition includes advertising guidance for composites as well as limited and broad distribution pooled funds.
Complying with the GIPS Advertising Guidelines is still voluntary. There is no requirement to prepare advertisements in accordance with the GIPS Advertising Guidelines. Following these new guidelines for pooled funds allows firms to advertise a specific pooled fund and include the claim of GIPS compliance. The new provisions replace the requirements previously included in the Guidance Statement on Broadly Distributed Pooled Funds.
Firms have the ability to choose whether to include gross or net returns (or both) in GIPS Advertisements for limited distribution pooled funds or broad distribution pooled funds. GIPS Advertisements for all pooled funds must include benchmark returns when pooled fund performance is included. This is a change from the Guidance Statement on Broadly Distributed Pooled Funds, which did not require benchmark returns to be presented. The information included in a GIPS Advertisement must be consistent with the information included in the pooled fund’s related GIPS Report.
The 2020 edition of the GIPS standards has an effective date of January 1, 2020. GIPS Reports that include performance for periods ending on or after December 31, 2020 must be prepared in accordance with the 2020 edition of the GIPS standards. Firms may choose to early adopt the 2020 GIPS standards. If firms choose to early adopt, they must comply with all requirements of the 2020 edition of the GIPS standards.