GIPS (11.3.24) Flashcards
Verification
An investment firm’s voluntarily engaging an independent third party to test the firm’s design and implementation of certain performance measurement policies and procedures
Can GIPS compliance be claimed for specified composites
No
Can GIPS compliance be claimed for specific pooled funds
No
Can GIPS compliance be claimed for specific portfolios
no
Can GIPS compliance be claimed for the entire firm
yes
Composite
aggregation of one or more portfolios that are managed according to a similar investment mandate, objective, or strategy
Segregated Account
Portfolio owned by a single client (SMA)
Pooled fund
1) Broad distribution: regulated under framework that would permit general public to or hold the pooled fund’s shares and not exclusively offered in one-on-one presentations (mutual funds)
2) Limited distribution: anything not a broad distribution (PE or HF)
5 Objectives of GIPS standards
1) Promote investor interests and instill investor confidence
2) Ensure accurate and consistent data
3) Obtain worldwide acceptance of a single standard for calculating and presenting performance
4) Promote fair, global competition among investment firms
5) Promote industry self-regulation on a global basis
8 Standards of GIPS
1) Fundamentals of compliance
2) Input data and calculation methodology
3) Composite and pooled fund maintenance
4) Composite time-weighted return report
5) Composite and money-weighted return report
6) Pooled fund time-weighted return report
7) Pooled fund money-weighted return report
8) GIPS advertising guidelines
Definition of the firm
Investment firm, subsidiary or division held out to the public as a distinct business entity
Total firm assets
Aggregate fair value of all assets (whether or not discretionary or fee-paying)
does not include advisory-only assets or uncalled committed capital
How often does the TMR need to be calculated (non private markets)
at least monthly as of the calendar month end or last business day of the month
if returns are not calculated daily and portfolio receives an intra-month large cash flow, portfolio must be valued and a sub-period return must be calculated at the time of the large cash flow
How often does TWR need to be calculated (private markets)
at least quarterly
Large cash flow
External cash flow of such size that it may distort the return if the portfolio is not valued and sub-period return is not calculated at the time of the cash flow
may be defined either relative to an absolute monetary threshold or as a percentage of the portfolio or composite assets
How often does TWR need to be calculated (pooled fund)
at least annually
TWR Formula
(V1 - V0) / V0
TWR using Modified Dietz method
(V1 - V0 - CF) / (V0 + sum of each flow multiplied by its weight)
When would a firm choose MWR over TWR
If the firm has control over the external cash flows AND 1) the portfolios are closed-end, fixed life, or fixed commitment OR
2) illiquid investments are significant part of the investment strategy
How often do MWR need to be calculated
annualized, since inception, annually
returns for periods of less than one year must not be annualized
Do custody fees count as transaction fees
no
When must composites for institutional investors reduce the gross-of-fees return by the entire amount of the bundled fee
if transactions costs cannot be identified and segregated from a bund fee
Definition of fair value
Amount at which an investment could be sold in an orderly, arm’s length transaction between willing parties and must include any accrued income on fixed-income securities and all other investments that earn interest income
3 Ways of calculating time-weighted composite returns
1) Asset-weighting the individual portfolio returns using beginning-of-period values
2) Using a method that reflects both beginning-of-period values and external cash flows
3) Using aggregate return method
Criteria for including portfolio in composites
1) All actual, fee-paying, discretionary segregated accounts must be included in at least one composite
2) Discretionary segregated accounts that are non-fee paying may be included in composites, but neither nondiscretionary not simulated or model portfolios may be included in any composite
3) Pooled funds must be included in any composite for which they meet the composite definition
4) A composite must include all portfolios that meet the composite definition
when can a portfolio be switched from one composite to another
1) Client revises the mandate, objective, or strategy governing the investment of portfolio assets and the guideline changes are documented
2) The original composite is redefined in such a way that the portfolio no longer fits it
3) In the event of significant cash flows, a portfolio may be ~temporarily~ removed from the composite
Two types of GIPS Reports
1) GIPS Composite Report
2) GIPS Pooled Fund Report
For each GIPS Composite report that includes time-weighted returns, how long do firms need to show annual performance
5 years and build to 10 years
if not 5 years of data, present returns since inception and build to 10 years
Elements to include in GIPS Composite report that presents a time-weighted return
1) Composite and benchmark annual returns for all years
2) Number of portfolios (if 6 or more) in the composite at each period end
3) The amount of assets in the composite
4) The amount of total firm assets at the end of each period
5) A measure of internal dispersion of individual portfolio returns for each annual period if the composite contains six or more portfolios for the full year
6) If monthly composite returns are available, a three-year annualized ex post standard deviation of the composite and benchmark returns as of each annual period end
Internal dispersion
a measure of the spread of the annual returns of individual portfolios within a composite
Acceptable measures of internal dispersion
1) High/low range
2) Equal weighted standard deviation of portfolio returns
3) Asset-weighted standard deviation of portfolio returns
How does GIPS treat cash
Returns from cash and cash equivalents must be included in all return calculations, even if the firm does not control the specific cash investments
Transaction costs
brokerage commissions, exchange fees, and/or taxes, and/or bid-offer spreads from either internal or external brokers
What is the guideline for when new assets should be included in a composite
“on a timely and consistent basis after each portfolio comes under management”
when must returns for terminated portfolios be calculated for
through the last full measurement date
if terminated in mid month, use end of previous month
when a composite has a minimum portfolio value and the value of the portfolio falls below the minimum, what is the proper action
exclude that portfolio from that composite for the time period that it is below the minimum level
minimum number of portfolios in a composite
no minimum or maximum
must a firm disclose the number of portfolios in a composite, and how often
yes, annually, unless there are 5, then you don’t need to dislcose
4 Requirements that allow portability
1) substantially all of the decision makers are employed at the new firm
2) the decision making process remains in tact with the new firm
3) the new firm maintains documents that support the reported performance
4) there must be no break in track record between old firm and new firm
If only first three are met, the new firm may use the performance of the old firm, but not link the two
what is the purpose of porting a portfolio
to link the performance of a past firm to a new firm
