GIPS revisions will require risk, fair-value reporting

Investment management firms will be required for the first time to provide risk disclosure and report returns based on fair-value measures under Global Investment Performance Standards revisions that become effective Jan. 1.

The revisions to GIPS — a voluntary set of performance presentation standards developed by the CFA Institute for the investment management industry worldwide — include requiring money management firms to disclose whether their compliance to GIPS has been verified by an independent firm. However, revised standards do not make verification mandatory.

Risk disclosure will require the three-year standard deviation of monthly composite portfolio performance and a discussion of risk in the investment management strategy.

“Some argue standard deviation is not a risk measure,” said Jonathan Boersma, executive director of the Global Investment Performance Standards of the CFA Institute, and a member of the nine-person GIPS executive committee, which independently adopts revisions to GIPS. “But it’s the basis of a lot of risk measures. It’s a measure of volatility or variability of returns. It’s relatively well understood and provides a basis for comparison data.”

Currently, GIPS recommend firms disclose risk measures but there was no requirement and no consistent measure, he said. “As a result, there is no comparability in risk measurement.”

The GIPS fair-value measurement requirement follows a general trend by the Financial Accounting Standards Board and International Accounting Standards Board to move to fair-value accounting, Mr. Boersma said. Currently, GIPS require market valuation. The revision won’t mean any change in valuation for assets in liquid markets where prices are readily available.