The perception of Global Investment Performance Standards (GIPS) as the driest of esoteric subjects presents a significant barrier to explaining their importance. But this is a hurdle that must be overcome by wise investors, both individuals and institutions. The standards are there to enable them to make decisions about who is best qualified to look after their money on a more fully informed basis.

What exactly are GIPS, then, why are they so important, and which fund managers have been most assiduous in implementing them? GIPS are not new. Although a number of substantial revisions were implemented from January 1 this year, as part of the policy of continuous evolution, they have been around since 1999, long enough for investors, and their fund managers, to become comfortable with them.

GIPS were developed by the Association of Investment Management Research (since renamed the CFA Institute). They are a set of best practice guidelines governing the presentation of performance claims by asset managers to enable investors to make like-for-like comparisons of different investment management firms and their investment strategy. Compliance with the standards is voluntary for asset managers, but can be very helpful for investors in verifying their claims on investment performance.

"GIPS provide clients with a clear understanding of a firm's performance over time," observes James Fairbairn, Portfolio Director at GAM in London. "What you see is what you get."This is important because asset managers need to ensure that the numbers they present provide the highest degree of transparency possible on performance that they are achieving with the money entrusted to them for management."

Traditional marketing of performance figures has been known to focus on a model portfolio, or a best-performing portfolio, giving investors little realistic idea of what to expect from their own assets. GIPS provide a size-weighted average return to investors net of fees and expenses. In the best of all possible worlds, GIPS compliance would form an integral part of the process, with investors awarding mandates only to asset managers who toe the GIPS line.

Carl Bacon, one of the founding fathers of GIPS, dating back to his involvement in the original GIPS committee back in 1995, holds understandably strong views on the subject. "It's a question of basic hygiene," he asserts. "If an asset manager is not compliant with GIPS, you have to ask: Why not? Do they have weak systems and inadequate processes? Or do they not believe in best practice?"

"You know you can rely on the presentation when an asset manager is GIPS-compliant. If they're not, the chances are that the data will have been massaged, wittingly or unwittingly, in the interests of putting their best foot forward."

GIPS are particularly relevant to private clients, he continues, because of their almost inevitable lack of financial sophistication relative to professional, institutional investors. The implication is that professionals know ­ or should know - the tricks that can be deployed to present performance in the best possible, but often misleading, light. Private investors don't.

In the absence of GIPS compliance, then, performance can be spun to win new business, undeservedly. This underlines the importance of continuing to strive to educate end investors. "The principle of GIPS is very relevant to clients, and it is in their own direct interests to know more about the asset managers they are considering appointing," says James Fairbairn. "They need to know exactly what levels of performance those managers have achieved for existing clients and the risks they have taken to achieve these returns. GIPS compliance ensures that this happens. " Asset managers operating to the best global standards will offer a further level of comfort to investors by having their compliance independently verified by an external auditor.

GIPS also provide a high degree of reassurance to trustees who have responsibility for client assets. Awarding an investment mandate to a manager with no process or track record to back up its claims is by definition riskier than awarding that mandate to a GIPS-compliant manager. The vast majority of trustees would surely welcome that extra layer of reassurance that they are making the right decision.

But GIPS compliance is more than a box-ticking financial health and safety issue. Its importance lies at the very core of asset management: investment performance. Carl Bacon believes that the improvements in reporting that GIPS help bring about leads directly to improved investment performance. "I have absolutely no doubt about the connection between the two," he says. "Better analysis heightens the investment manager's understanding of performance, and if you understand better, your awareness grows of what delivers that performance."

Even a cursory study demonstrates, then, that GIPS are good. They are good for the investor, and they are good for the asset manager, and they are good for the industry in building transparency and trust. While compliance has reached near-universal levels in institutional markets in the USA and the UK, and is taking firmer root in continental Europe and Asia, only a small number of private client specialists have followed suit.

"More and more institutional investors are asking if asset managers are GIPS-compliant," concludes Calum Thomson, partner in charge of investment management at Deloitte, a verifier of GIPS-compliance claims. "Having performance figures verified externally, in the way that a listed company is required to have its accounts independently audited, provides those investors with an added level of reassurance that figures from different asset managers, or from different funds within one house, are consistently calculated and directly comparable. Private equity investors would be well advised to follow suit."