What are the recommended (but not required) practices under GIPS?

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AcadiFi · Accepted Answer

GIPS distinguishes between required provisions (must follow to claim compliance) and recommended provisions (best practice but not mandatory). Following recommendations doesn't change the compliance claim itself but significantly strengthens credibility with sophisticated clients and consultants.

Key recommendations:

1. Valuation frequency: value portfolios at the time of any external cash flow, regardless of size threshold. Required minimum is monthly plus on 'large' flows, but daily valuation is strongly recommended for institutional-quality performance reporting.

2. Verification: engage an independent third-party verifier to confirm compliance. Recommended but not required. Most sophisticated investors (public pensions, sovereign wealth funds) now demand verified track records.

3. Composite examination: performance examination at the composite level by the verifier, going beyond the firm-wide verification. Provides additional assurance that a specific composite's numbers are accurate.

4. Additional risk measures: beyond the required three-year ex-post standard deviation, firms can present downside deviation, tracking error, information ratio, Sortino ratio, beta, or other measures that help clients understand strategy-specific risk.

5. Longer performance history: present more than the minimum five years when available; longer history strengthens manager selection due diligence.

6. Supplemental information: present relevant but non-required data like turnover, holdings concentration, sector allocation, attribution analysis. Must be labeled 'supplemental' and placed alongside (not instead of) required disclosures.

7. Equal-weighted composite returns: show as supplemental alongside required asset-weighted returns for insight into dispersion.

8. Money-weighted returns for traditional composites: optionally present MWR as supplemental for strategies with meaningful cash-flow timing effects.

Example: Pinebrook Advisors is GIPS-compliant and also engages Dalrymple LLP for annual verification and composite-level examination. They present required disclosures plus downside deviation, tracking error, and sector attribution as supplemental. Result: the composite report is more compelling for institutional RFPs and consultant databases than a bare-minimum compliant report would be.

What are the recommended (but not required) practices under GIPS?

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