I. WHY WERE THE GIPS STANDARDS CREATED?

Institutions and individuals are constantly scrutinizing past investment performance returns in search of the best manager to achieve their investment objectives.

In the past, the investment community had great difficulty making meaningful comparisons on the basis of accurate investment performance data. Several performance measurement practices hindered the comparability of performance returns from one firm to another, while others called into question the accuracy and credibility of performance reporting overall. Misleading practices included:

• Representative Accounts: Selecting a top-performing portfolio to represent the firm’s overall investment results for a specific mandate.

• Survivorship Bias: Presenting an “average” performance history that excludes portfolios whose poor performance was weak enough to result in termination of the firm.

• Varying Time Periods: Presenting performance for a selected time period during which the mandate produced excellent returns or out-performed its benchmark—making comparison with other firms’ results difficult or impossible.

Making a valid comparison of investment performance among even the most ethical investment management firms was problematic. For example, a pension fund seeking to hire an investment management firm might receive proposals from several firms, all using different methodologies for calculating their results.

The GIPS standards are a practitioner-driven set of ethical principles that establish a standardized, industry-wide approach for investment firms to follow in calculating and presenting their historical investment results to prospective clients. The GIPS standards ensure fair representation and full disclosure of investment performance. In other words, the GIPS standards lead investment management firms to avoid misrepresentations of performance and to communicate all relevant information that prospective clients should know in order to evaluate past results.