Explanation

Correct Answer: B - facilitates the understanding of the sources of risk and excess return only.

Why this is correct:

1. GIPS (Global Investment Performance Standards) compliance provides standardized performance reporting that allows asset owners to:

   • Compare performance across different investment managers using consistent methodologies
   • Understand how returns were generated
   • Identify sources of risk and excess return through transparent reporting

2. What GIPS compliance does NOT do:

   • It does NOT eliminate the need for in-depth due diligence. Asset owners must still conduct thorough due diligence on investment managers, including:
     • Investment philosophy and process
     • Risk management practices
     • Organizational structure and stability
     • Compliance and regulatory history
     • Personnel qualifications and experience

3. Key benefits of GIPS for asset owners:

   • Comparability: Standardized performance presentation allows for fair comparisons
   • Transparency: Clear disclosure of calculation methodologies and composite construction
   • Verification: Independent verification provides assurance that GIPS standards are properly implemented
   • Understanding performance drivers: Helps identify whether returns come from skill, luck, or risk-taking

Why A is incorrect: GIPS compliance does not eliminate the need for due diligence. Due diligence involves much more than just performance verification - it includes assessing investment processes, risk management, organizational structure, and other qualitative factors.

Why C is incorrect: Since A is incorrect, C cannot be correct because it includes the incorrect statement about eliminating due diligence.

Additional Context:

• GIPS is a voluntary standard created and maintained by CFA Institute
• It aims to ensure fair representation and full disclosure of investment performance
• While GIPS provides standardized performance data, it does not replace comprehensive due diligence processes that asset owners must undertake when selecting and monitoring investment managers.