Institutional Investors, Pension Funds, Public Funds

CalPERS Hopes Other Funds Will Follow its GIPS Adoption

Having achieved compliance with CFA Institute’s Global Investment Performance Standards (GIPs) for the first time, for the year ending June 30, 2017, the California Public Employees’ Retirement System (CalPERS) hopes its adoption of the standards will spur other U.S. state pension plans to follow suit.

“One of the reasons this is a big deal is that CalPERS is one of the first pension funds in the U.S. and in the world to adopt GIPs. This demonstrates our leadership in the space and our commitment to increase transparency,” according to Rob Paterson, a CalPERS investment officer responsible for risk and performance, who presented on the system’s GIPs adoption at the fund’s Feb. 12 investment committee meeting. “We hope that we will have other pension plans follow on and begin adopting the standards—which are a set of industry best practices—so that  we can have increased comparability of  our performance results relative to other plans,” he said.

CFA Institute says it is now increasing its level of commitment to GIPs and its efforts to encourage asset owners’ adoption of GIPs. “We are looking at that currently and working up  one-  and three-year plans the we expect to initiate in the autumn,” according to Paul Smith, CFA Institute CEO.  He added, “CalPERS has done a wonderful job setting itself up as best in class globally in terms of responsible asset management, and other people and funds do take notice of the standards that they set.”

One of the reasons this is a big deal is that CalPERS is one of the first pension funds in the U.S. and in the world to adopt GIPs.

What are GIPS standards?

Introduced in 1999, the GIPS standards are universal, voluntary standards based on the fundamental principles of full disclosure and fair representation of investment performance, according to a CFA Institute release. The GIPS standards are administered globally by CFA Institute and have been adopted by 1,653 firms in more than 40 markets around the world, including some or all of the assets of 24 of the top 25, and 85 of the top 100, asset management firms, the release says, citing data from Cerulli Associates.

Smith explained that GIPs were born 20 years ago from asset owners’ desire to have a level playing field for evaluating the performance of their asset managers.  “That’s how it started, but it never really caught fire with asset owners because they were busy encouraging asset managers to comply. I guess the asset owners felt like if the asset managers are adopting, ‘I don’t need to adopt’,” he speculated, noting that now 70% of institutional asset management community is GIPs compliant.

Twenty years ago most asset owners outsourced the management of the vast majority of the assets in their care, which may account for why so few have adopted the standards themselves to date, Smith observed.  “Now, asset owners are managing more money internally, branching into more sophisticated strategies, such as alternatives and emerging markets, for example.  GIPs was always applicable to asset owners but now it is even more so.”

Whereas asset managers report GIPs performance on their own holdings, asset owners need to aggregate those performance numbers across their whole portfolio to ascertain clearly their fund’s overall performance.

Full Disclosure

“It is important that the fund is adopting these standards because the standards are based on two core ethical standards, full disclosure and fair representation—they are intended to increase trust and confidence in the investment performance information CalPERS presents,” Paterson said. He likened the standards to Governmental Accounting Standards Board (GASB) standards from an accounting perspective. GASB sets accounting and financial reporting standards for U.S. state and local government.

Two noteworthy changes that CalPERS had to make as part of becoming GIPs compliant were moving the valuation of it real assets holdings from annual to a quarterly basis; it began including its investment offices’ internal expenses in performance reporting, Paterson said.

“There is currently a very large discrepancy in performance reporting amongst public plans in the U.S. last year,” according to Wylie Tollette, a former CalPERS’ COO who left the system last December, speaking in the public comment part of the CalPERS meeting. He cited a May 2017  Pew Charitable Trust report that claimed that currently less than half of the U.S. state plans report a combination of gross and net performance and that there are 10 plans that report gross performance only.

“So, it’s a very important to understand your performance returns because it’s what you use to make future investment decisions and to make better investment decisions.  And expenses, as we know all, matter.  So the incorporation of accurate expenses—including the inclusion of internal investment office expenses, current valuations and all the other bits and pieces that go into reporting according to GIPs—makes a huge difference in the quality of the reporting landscape.  Other than CalPERS, only Ohio Teachers currently also takes this step,” Tollette said.

“STRS Ohio began using a third party performance evaluation using GIPS standards in 2008. This came about because we considered it best practice in the investment industry,” a spokesman for the fund explained. “We asked it from our external managers and thought it should apply to internal management as well (we manage about 70% of assets in-house). STRS Ohio uses this third-party review as part of our audit to approve incentive payments, and it also supports our transparency efforts.”

According to a 2016 report from BNY Mellon, titled Practical Guidance: The GIPs Standards for Asset Owners, “the popularity and worldwide adoption of the Global Investment Performance Standards by investment management firms is largely due to demand by asset owners. In order to trust investment performance when hiring an outsourced manager, asset owners increasingly require investment managers to comply with the GIPS standards. Through these interactions, asset owners have come to understand the importance of one global, ethical set of standards for performance measurement calculation and presentation and want to apply the same principles to their own performance reporting.  As a result of the increased transparency and due diligence on the part of asset owners, we are seeing a growing interest in attaining GIPS compliance amongst the asset owner community.

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