GIPS (reading 4)

Question 1

GIPS meaning

Answer 1

Global investment performance standard

Question 2

Why are GIPS created?

Answer 2

• report sent to investors all over the world. Comparison was hard to do back the in days. It was tempting to pick the best performance and excluded performance of low returns. -> called survivorship bias

Question 3

What is survivorship basis

Answer 3

Pick the best performance and exclude performances of low returns

tempting for firms to handpick the time periods, marked by high performance

Question 4

GIPS is

Answer 4

a standard set of ethical practices -> created and put in place by the CFA.

standard of acceptable performance

Question 5

Who can claim compliance ?

Answer 5

investment manager only - manager who manages assets

Question 6

Who can’t claim compliance?

Answer 6

• the firm itself can’t, software developer and vendor can’t, plan sponsor can’t

Question 7

What is the point of the GIPS

Answer 7

analyze historical data, by the investors, that has been published by money manager.

make an apple to apple comparison

Question 8

How is the GIPS standard applied ?

Answer 8

industry-wide provide

provide to evaluate the relative performance of funds manager

Question 9

How is the compliance level? all in or halfway in, or not at all?

Answer 9

Compliance with the GIPS is either all in or not at all.

Question 10

Who benefits from the compliance?

Answer 10

• Clients and prospective clients and the investment firm itself
• Client degree of confidence when comparing portfolio among and between amangers
• Compliance also mean: firm uphold a certain standard of ethical and professional behavior
• Management firm -> greater level of credibility

Question 11

Concept of composites

Answer 11

• Discretionary group of portfolios managed according to a specific mandate or stategy
• discretionary portfolio is those portfolio managers have discretion on the buy, sell, and hold decisions.
• GIPS firms -> include all fee-paying and discretionary portfolios
• subjective selection not allowed
• Composite guideline prevent firms from using oNLY their best-performing pro folios, to not skew (lie/affect) presentation results

Non-discretionary not included

• new account included in composite in a timely manner - once the account comes under full discretionary management

Question 12

What is a non- discretionary account?

Answer 12

An account where the client makes all the trading decision

Question 13

What is a discretionary account?

Answer 13

one that allows a broker to buy and sell securities without the client’s consent

Question 14

Terminated accounts ?

Answer 14

Must be included in the historical data up to their last full measurement period in which they were under management -> this will a void the survivorship bias

Question 15

Switched Account?

Answer 15

Accounts’ can’t be switched from one composite to another unless the client’s risk and return objectives have changed significantly and are documented

Question 16

Verification Process

Answer 16

• 3rd party company hire by the firm who claim compliance
• 3rd party evaluates the process under which the compliance is claimed, and to collaborate the firms assumptions

Verification is recommended but not required

Question 17

2 key issues with verification

Answer 17

1. whether or not the firm has complied with all firm-wide composite construction requirement
2. Whether the firm’s processed and procedures have been performed in a compliant manner