GIPS Flashcards
Why was GIPS created
To make meaningful comparisons of manager investment performances without misleading practices
Misleading Practices in reporting
- Representative Accounts
(represent only top performers, remove outliners/low performing funds) - Survivorship Bias
(average history, not including terminated funds) - Varying Time Periods
(presenting time periods with stellar performance)
What is GIPS
“A practitioner-driven set of ethical principles that
establish
a standardized, industry-wide approach
for
investment firms to follow
in
calculating and presenting
their
historical investment results to prospective clients”
To whom does GIPS apply to
Investment Management Firms that ONLY manage assets.
It should be a firm wide process, not a single product/or composite compliance.
Finally, comply with ALL GIPS rules, not just a select few.
A multi-national financial services holding company is unlikely to be solely operating as an investment firm, and the scope of the business could also make it more difficult to claim compliance on a firm-wide basis.
Who is served by the GIPS
The clients
- They get a historical track record that is complete and fairly presented
- Easily comparable when the same standard is used by different research companies
What are composites
Composite is an aggregation of one of more portfolios
managed
according to a similar investment
mandate, objective or strategy
How to construct a composite?
The construction of the composite should be done by a
pre-established criteria,
not an ex-ante basis.
This prevents the firm from excluding bad-performers
Purpose of Composites in Performance Reporting
Easily comparable across the board/industry
Requirements for verification
Not mandatory, but once a GIPS claim has been made, it is recommended an independent 3rd party perform a verification to increase confidence in the firm’s compliance claim
Accrual accounting
The recording of financial transactions as they come into existence rather than when they are paid or settled
Additional Information
Information that is required/recommended under GIPS
and
is not considered supplemental information
Administrative Fee
All fees other than Trading Expenses, Investment Management Fees. Includes \:-Custody, \:-Accounting, \:-Auditing, \:-Consulting, \:-Legal, \:-Performance measure fees \:-and other fees
All-In-Fee
A type of bundled fee that can include any combination of
1) Investment Management Fees,
2) Trading Expenses,
3) Custody
4) & admin fees.
All-In-Fees are
:- client specific
:- and typically offered in certain jurisdictions where
asset management, brokerage and custody services
are offered by the same company
Benchmark
A point of reference
against
which the composite’s
performance and/or risk is compared
Benchmark Description
General information regarding
the
investments, structure, and/or characteristics
of the benchmark.
The description must include the key features of the benchmark for a readily recognized index or other point of reference
Bundled Fee
A fee that combines multiple fees into one total fee.
Can include any combo of investment, trading, custody, and admin fee. Ex: Wrap Fee & All-In-Fees
Capital Employed (Real Estate)
- Denominator of the return calculations
- Defined as the “weighted average equity” during the measurement period.
- Does not include any income or capital return earned during the measurement period.
- Beginning capital is adjusted by weighting the External CF that occurred during the period
Capital Return (Real Estate)
Change in value of the Real Estate Investment
and
cash and/or cash equivalent assets held throughout
the measurement period,
adjusted for capital expenditures (-)
and
net proceeds from sales (+).
Computed as a percent of Capital Employed.
Carried Interest
Real Estate & Private Equity
Profits that General Partners are allocated
from
investment profits made by the investment vehicle.
Carve-Out
Portion of portfolio that is representative of a distinctive investment strategy.
Used to create a track record for a narrower mandate
from
a multiple-strategy portfolio managed to a broader mandate
Closed-end Fund (Real Estate & Private Equity)
A type of investment vehicle where the \:- # of investors, \:- total committed capital \:- and life are fixed and not open for subscriptions and redemption.
Close-ended funds have a capital call process in place, controlled by the general partner.
Committed Capital (Real Estate & Private Equity)
Pledges of capital to an investment vehicle by investors or by the firm.
Not drawn at once, but over time
Compliant Presentation
A presentation for a composite
that
contain all the information required by the GIPS
and
may also include
additional information or supplemental information
Composite
An aggregate of one or more portfolios
managed according
to a similar investment mandate, objective or strategy
Composite Creation Date
Date when the firm first groups one or more portfolios to create a composite.
The composite creation date is not necessarily the same as the composite inception date
Composite Definition
Detailed criteria that determine the assignment of portfolios to composites.
Criteria may include :-investment mandate, \:-style, asset class, \:-use of derivatives, \:- leverage, \:-investment constraints, \:- taxable, \:- pooled, etc
Composite Description
An abbreviated version of the composite definition, with all the pertinent information regarding
:-mandate,
:-objective
:-& strategy
so an prospective client understands what it is all about.
Composite Inception Date
The initial date of the composite’s performance record.
Not necessarily the same as composite creation date
Composite Terminate Date
The date the last portfolio exits the composite
Custody Fee
The fees payable to the custodian for the safekeeping of the portfolio assets.
Custody fees are considered to be administrative fees and typically contain an asset-based portion and a transaction based portion.
May include charges for additional fees, including accounting, securities lending and performance measurements.
Custodial fees are per transaction based. Not part of trading expenses
Directive Investments (Private Equity)
Investments made directly in private equity investments rather than in fund investment vehicles or cash &/or equivalents.
Distinct Business Equity
A unit, division, dept, or office that is organizationally & functionally segregated from others and retain discretion over the assets it manages and should have autonomy over the investment decision making process.
Could be a legal entity, have distinct market or client type or have different investment process
Distribution (Real Estate & Private Equity)
Cash or stock distributed to Limited Partners from an investment vehicle. Distributions are at the discretion of the General Partner. Usually recallable and non-recallable distributions
DPI (Real Estate & Private Equity)
Since Inception Distributions
divided by
Since Inception Paid In Capital
Evergreen Fund (Private Equity)
An open-ended fun that allows for on-going subscriptions and/or redemption by investors
Ex-ante
before the fact
Ex-post
after the fact
External CF
Capital that enters or exits the portfolio
External Valuation (Real Estate)
An assessment of value performed by an independent external 3rd party who is a qualified, professionally designated, certified or licensed commercial property valuer/appraiser
Fair Value
The amount at which an investment could be exchanged in a current arm’s length transaction between willing parties with knowledge and prudence. Valuation must be determined using objective, observable, unadjusted quoted market price for an identical investment in the active market. If unavailable, must use best estimate. Fair value must include accrued income
Fee Schedule
Firm’s current schedule of investment management fees or bundled fees relevant to the particular compliant presentation
Final Liquidation Date (Real Estate & Private Equity)
The date when the last portfolio in a composite was fully distributed
Firm
The entity defined for compliance with the GIPS
Fund of Funds (Private Equity)
An investment vehicle that invests in underlying investment vehicles. Private equity fund of funds predominately invest in closed-end funds and may make opportunistic direct investments
General Partner (Real Estate & Private Equity)
A class of parter in a limited partnership. The GP retains liability for actions of the LP. GP is typically the fund manager and the LPs are the other investors in the Limited Partnership. GP earns the investment management fee and gets a % of the Limited Partnership profits
Gross-of-Fees
The return on investments reduced by TRADING expenses during the period.
Gross-of-Fees (Real Estate & Private Equity)
The return on investments reduced by TRANSACTION expenses during the period.
Income Return (Real Estate)
The investment income earned on all investments (including cash and cash equivalents) during the measurement period net of all non-recoverable expenditures, interest expense on debt & property fees. Computed as a % of capital employed
Internal Dispersion
Measure of the spread of the annual returns of individual portfolios within a composite. Measures may include, but not included to high/low range, & stand dev (asset weighted or equal)
Internal Valuation (Real Estate)
A firm’s best estimate of value based on the most current and accurate information available under the circumstances. Methodologies include Discounted CF, sales comparison or replacement cost approach, review of all significant events that could have a material impact.
Investment Management fee
A fee payable to the firm for the management of a portfolio. Investment management fees are typically asset based, performance based fees. Investment management fees also included Carried Interest
Investment Multiple (TVPI) (Real Estate & Private Equity)
Total Value divided by Since Inception Paid-In capital
Large CF
The level at which firm determines that an external CF may distort performance if the portfolio is not valued. Firms must define the amount in terms of the value of cash/asset flow or in terms of a percentage of the portfolio assets or the composite assets
Limited Partner (Real Estate & Private Equity)
In investor in a Limited Partnership. The LP is supervised by a GP, and it not liable to legal actions and losses beyond committed capital
Limited Partnership (Real Estate & Private Equity)
Legal structure used by most Private Equity & Real Estate Closed-End funds. Limited Partnerships are usually fixed life investment vehicles. GP manages the Limited Partnership depending on partnership agreement
Link
- Mathematical Linking - method by wish sub-period returns are geometrically combined to calculate the period return using the following formula
Period return: [(1+R1)(1+R2)…(1+Rn)]-1 - Presentational Linking - to be visually connected within a compliant presentation
Market Value
The price at which investors can buy or sell an investment at a given time multiplied by the quantity held plus any accrued income
Must
A task or action that is mandatory
Must not
A task or action that is prohibited
Net-of-Fees
The gross-of-fees returns reduced by investment management fees (incl performance based fees & carried interest)
Open-End Fund
A type of investment vehicle where the # of investors and the total committed capital is not fixed. Open for subscriptions and redemption
Paid-In Capital
Capital inflows to an investment vehicle. Committed capital is drawn from LPs over a period of time through a series of capital calls, at the discretion of GP or firm. Paid in Capital includes distributions that are subsequently recalled by the GP or firm and reinvested into investment vehicle
Performance Based Fee
An investment management fee based on the performance of the portfolio relative to benchmark
Performance Examination
A detailed examination of a specific composite’s compliant presentation by an independent verifier
Performance Examination Report
A report issued after performance examination, detailing compliance with GIPs
Periodicity
The length of the time period over which a variable is measured
PIC Multiple (Real Estate & Private Equity)
Since Inception Paid-In Capital
divided by
Cumulative Committed Capital
Portfolio
An individually managed group of investments. May be one account or pooled investment vehicle
Primary Fund (Private Equity)
An investment vehicle that makes direct investments rather than investing in other investment vehicles
Private Equity
Investment strategies include but are not limited to venture capital, leveraged buyouts, consolidations, mezzanine and distressed debt investments, and a variety of hybrids, such as venture leasing & venture factoring
Professionally designated, certified or licensed Commercial Property valuer/appraiser (Real Estate)
Europe, Canada, SE Asia: RICS Royal institute of Chartered Surveyors
US: MAI Member of the Appraisal Institute + state regulated certificates/licenses
Proprietary Assets
Investments owned by the Firm, Firm’s management and firm’s parent that are managed by firm
Prospective Clients
Any person or entity that is interested in the firm’s composite strategy and qualifies to invest in the composite. Existing clients may also qualify if they are interested in another investment strategy
Public Market equivalent (PME) (Private Equity)
The performance of a public market index expressed in terms of an IRR, using the same CF and timings as of the composite. A PME can be used as a benchmark by comparing the IRR of a private equity composite with the PME of a public market index
Real Estate
- Wholly or partially owned properties
- Commingled funds, property unit trust, & insurance co separate accounts
- Unlisted private placement securities issued by private REITs and REOCs
- Equity oriented debt or any private interest in a property where some portion of return to the investor at the time of investment is related to the performance of the underlying real estate
Realization Multiple (DPI) (Real Estate & Private Equity)
Since Inception Distribution divided by Since Inception Paid-In capital
Recommend/Recommendation
A best practice, but not requirement
Require/Requirements
A task or action that must be followed through
Residual Value (Private Equity & Real Estate)
The remaining equity that LPs have in an investment at the end of the performance reporting period
RVPI (Real Estate & Private Equity)
Residual Value divided by Since Inception Paid-In capital
Secondary Fun (Private Equity)
An investment vehicle that buys investors in existing investment vehicles
Settlement Date Accounting
REcognizing the asset or liability on the date when the exchange of cash and investments is completed.
Should
A task or action that is recommended, not mandatory
Significant CF
The level at which the firm determines the client-directed external CF may prevent the firm from implementing the external CF
Since Inception (Real Estate & Private Equity)
From the initial CF of a composite
Since Inception Internal Rate of Return (SI-IRR) (Real Estate & Private Equity)
The IRR is the implied discount rate or effective compound rate that equates the PV of Cash outflows to PV of Cash Inflows. SI-IRR is the rate at which PV of CF is equal to Period End Value
Standard Deviation
Measure of variability of returns. It quantifies the distribution of the returns of the individual portfolio within the composite compared to benchmark
Sub-Advisor
A 3rd party investment manager hired by the firm to manage some or all of the firm’s assets
Supplemental Information
Performance related information that supplements or enhances the required and recommended provisions of GIPS
Temporary New Account
An account for temporarily holding client directed external CF until they are invested to remove effect of significant CF
Time-Weighted rate-of-return
Method of calculating period-by-period returns that negates the effects of external CF
Total Firm Assets
All discretionary and non-discretionary assets for which a firm has investment management responsibilities, including assets assigned to a sub-advisor
Total Return (Real Estate)
Rate of return (incld capital return & income return) expressed as a % of the Capital Employed over the measurement period
Total Value (Real Estate & Private Equity)
Residual Value + Distributions
Trade Date Accounting
Recognizing the asset or liability on the date of the purchase or sale (+3 is ok) and not on the settlement date
Trading expenses
The actual costs of buying or selling investments. Including brokerage, exchange fees, bid-offer spreads and custodial fees
Transaction Expenses (Real Estate & Private Equity)
Legal, financial, advisory, banking fees relating to selling, restructuring, and re-capitalizing
TVPI (Real Estate & Private Equity)
Total Value divided by Since Inception Paid-In capital
Unrealized Multiple (RVPI)(Real Estate & Private Equity)
Residual Value divided by Since Inception Paid-In capital
Verification
Process by which an independent verifier accesses whether
a. firm as complied with Composite construction requirements
b. Firm’s policies & procedures are designed to calculate and present performance in compliance with GIPS
Verification Report
Report issued after Verification
Vintage Year (Real Estate & Private Equity)
One of two
a. Year the investment vehicle’s first drawdown or capital call from its investors
b. Year when the first committed capital from outside investors is closed and legally binding
Wrap fee
A type of bundled fee and are specific to investment product.
Can be all-inclusive, asset based fees and may include a combo of investment management fees, trading expenses, custody fees and/or adminstrative fees. Wrap Fee Portfolios are also referred to as “Separately managed account” (SMA)
What happens when local laws conflict?
Where local laws and regulations regarding calculation and presentation conflict with GIPS standards, firms must abide by the local laws and regulations. They are still allowed to claim GIPS compliance but must disclose areas where the local requirements conflict with those of the GIPS standards.
Who should be presented w/a GIPS compliant presentation?
Must: prospective clients.
Recommended: existing clients
GIPS standards (0.A.9) state “firms must make every reasonable effort to provide a compliant presentation to all prospective clients. As long as a prospective client has received a compliant presentation within the previous 12 months, the firm has met this requirement. It is a GIPS recommendation, not a requirement, that all clients receive a compliant presentation on an annual basis (0.B.4).
