By Carl Bacon, CIPM, Chief GIPS Advisor at Confluence
Navigating the evolving landscape of Outsourced Chief Investment Officers (OCIOs) within the realm of the Global Investment Performance Standards (GIPS) is a pertinent concern in the financial sphere. The exposure draft of the GIPS Guidance Statement for OCIO strategies was published September 2023. After considering public comments, the final draft of the new guidelines is expected to be published later this year, with an anticipated effective date 12 months later.
These standards, rooted in ethical principles of fair representation and full disclosure, have encountered familiar concerns reminiscent of the early days of performance standards for traditional assets. Questions of applicability, flexibility, and potential regulatory reactions loom, with most OCIOs yet to decide on compliance, seeking standards that are not just a regulatory hurdle but serve as meaningful tools for comparison.
According to the CFA Institute an “OCIO provides investment advice and investment management services on an outsourced basis for Total OCIO Portfolios of institutional investors, such as pension funds, endowments and foundations”. OCIO investment advice takes many forms but typically includes liability analysis, development of a strategic asset allocation, portfolio construction and ongoing management.
GIPS are ethical standards for calculating and presenting investment performance based on fair principles of fair representation and full disclosure.
The public comments echo the same type of issues raised before the introduction of performance standards for more traditional assets some 25 plus years ago, – too expensive to apply, too flexible to be meaningful, favouring one type of manager over another etc, etc. Some potential responders are concerned about providing comments because of the reactions of regulators. They should be, the very closely related 2020 UK GIPS Standards for Fiduciary Management Providers were a direct result of regulators stepping in, concerned about a broader range of issues including transparency and performance presentation.
According to research by Cerulli Associates, slightly more than half, 52% of OCIOs have not yet decided if they will comply with the guidelines. “Most of the 52% that are undecided are not against the effort but want changes to the standards so they can be useful as a tool for comparison”, said Laura Levesque of Cerulli Associates.
There are genuine difficulties, and it will be interesting to see how the GIPS committees respond – but its undeniable standards are both useful and needed. The greater the complexity and opportunity for flexibility – the more standards are needed. The GIPS standards have shown themselves capable of responding to feedback and evolving over many years. Their success will ultimately depend on the search consultants and asset owners. If the end-users require compliance, and let’s not forget these standards are designed for the benefit of the end users of performance presentations, the guidelines will be a success. The GIPS guidance will allow OCIOs to establish a credible performance track record, meet due diligence requirements, and differentiate themselves in an increasingly competitive landscape. It is difficult to argue against the value of performance presentation standards.
As the GIPS committees navigate these complexities, the imminent guidelines hold the promise of establishing credible performance records for OCIOs, aiding due diligence, and positioning them uniquely in a competitive landscape. In this milieu, the success of these standards ultimately hinges on the demands and expectations of end-users, reinforcing the value of standardized performance presentations.
