Reading 4 Intro to GIPS - Global Investment Performance Standards

Question 1

Describe how a composite is formed.

Answer 1

By combining discretionary portfolios into one group that represents a particular investment objective or strategy. A composite representing a particular strategy must include all discretionary portfolios managed according to that strategy.

Question 2

Describe the aim of GIPS standards.

Answer 2

Provide clients and prospective clients with comparable and representative investment performance data. This is an industry-wide, standard approach for the calculation and presentation of investment performance. Firms who comply are forced to avoid misrepresentation and to communicate all relevant information that prospective clients should know to make informed investment decisions.

Question 3

Identify common misleading practices in performance presentations.

Answer 3

Representative accounts: Use of only the best-performing portfolios to represent the firm’s overall performance.

Survivorship bias: Historical data relating to investment performance excludes the performance of those accounts that fared poorly and were consequently terminated. This results in an overstatement of investment performance.

Varying time periods: Presenting performance relating only to those time periods during which the fund outperformed its benchmark or had exceptional performance.

Question 4

Who can claim GIPS compliance?

Answer 4

Only investment management firms that actually manage assets can claim compliance.

Question 5

List the 9 sections of the GIPS standards.

Answer 5

0.  Fundamentals of Compliance
1.  Input Data
2.  Calculation Methodology
3.  Composite Construction
4.  Disclosure
5.  Presentation and Reporting
6.  Real Estate
7.  Private Equity
8.  Wrap Fee/Separately Managed Account (SMA) Portfolios