The financial markets and investment management industry has become increasingly global in nature. A common problem when reporting investment performance across different borders is that some countries have performance measurements and disclosures that are tailored specifically to them but that differ greatly from those in other countries. Some countries do not even have any standardized approaches for investment firms to follow to ensure fair representation and full disclosure of performance information.

In the past, making meaningful comparisons on the basis of accurate investment performance data was difficult because of some misleading practices, such as:

• Representative accounts. Only the results of the best portfolio or securities are presented.

• Survivorship bias. For example, many mutual fund databases provide historical data about only those funds that are currently in existence. As a result, funds that have ceased to exist due to closures or mergers do not appear in these databases. Generally, funds that have ceased to exist have lower returns relative to the surviving funds. Therefore, the analysis of a mutual fund database with survivorship bias will overestimate the average mutual fund return because the database only includes the better-performing funds.

• Varying time periods. Only the results for profitable time periods are reflected.

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.

Who Can Claim Compliance

The GIPS standards apply primarily to firms that manage assets. The performance results of firms adopting GIPS will be more readily comparable. However, while firms are encouraged to adopt GIPS, the standards are voluntary.

Compliance is a firm-wide process.

Who Benefits from Compliance?

Asset managers and their prospective clients, asset owners and their oversight bodies are the primary beneficiaries of GIPS. GIPS allow effective comparisons; they can directly compare the performance results of firms adopting GIPS. Clients must still use due diligence.