3 - Introduction to the Global Investment Performance Standards (GIPS)

Question 1

LOS 3.a - Explain why the GIPS standards were created.

Answer 1

In the past, a variety of reporting procedures were misleading at best. Some of these misleading practices include:

• Representative accounts - showing a top-performing portfolio as a representative of a firm’s results.
• Survivorship bias - excluding “weak performance” accounts that have been terminated.
• Varying time periods - showing performance for selected time periods with outstanding returns.

Question 2

LOS 3.a - Explain what parties the GIPS standards apply to and who is served by the standards.

Answer 2

GIPS are a set of ethical principles based on a standardized, industry-wide approach. Investment firms can voluntarily follow GIPS in their presentation of historical investment results to prospective clients. These standards seek to avoid misrepresentations of performance. They apply to investment management firms and are intended to serve prospective and existing clients of investment firms. GIPS allow clients to more easily compare investment performance among investment firms and have more confidence in reported performance.

Question 3

LOS 3.b - Explain the construction and purpose of composites in performance reporting.

Answer 3

A composite is a grouping of individual discretionary portfolios representing a similar investment strategy, objective, or mandate. Reporting on performance of composites gives clients and prospects information about the firm’s success in managing various types of securities or results for various investment styles.

Question 4

Explain the procedure for identifying managed portfolios to be included in a composite.

Answer 4

A composite must include all portfolios that the firm has managed in accordance with this particular strategy. The firm should identify which composite each managed portfolio is to be included in before the portfolio’s performance is known. This prevents firms from choosing portfolios to include in a composite in order to create composites with superior returns.

Question 5

LOS 3.c - Explain the requirements for verification.

Answer 5

Verification is performed by a third party, not by the firm itself, on a firm-wide basis. This third part verifier must attest that (1) the firm has complied with all GIPS requirements for composite construction on a firm-wide basis and (2) the firm’s processes and procedures are established to present performance in accordance with the calculation methodology required by GIPS, the data requirements of GIPS, and in the format required by GIPS.

Question 6

Explain the GIPS verification recommendations (not requirements).

Answer 6

• Firms are encouraged to pursue independent verification. Verification applies to the entire firm’s performance measurement practices and methods, not a selected composite.
• Verified firms should include the following disclosure language: “[Insert name of firm] has been verified for the periods [insert dates] by [name of verifier]. A copy of the verification report is available upon request.”