GIPS

CFA Level III
#1

Suck. I am considering not investing more of my time… is there a 6 question GIPS section every year?

#2

https://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91309287

The Basics - What global investment performance standards (GIPS) are all about:

  • GIPS applies to firms, not individuals. An analyst cannot be “GIPS compliant”
  • The goal is fair representation and disclosure across investment opportunities for the public
  • It fosters the notion of “self regulation” within the industry
  • Each section includes “requirements” and “recommendations” for compliance. I would focus on the requirements if time is limited.
  • All actual, fee-paying, discretionary portfolios must be included in at least one composite
  • No non-discretionary portfolios, but non-fee paying portfolios may be included
  • Must calculate time-weighted total portfolio returns with external cash flows using daily weighting
  • Only actual assets, no model portfolios or simulations

The material on disclosures is easily testable along with some of the differences between the real estate and private equity sections.

Mandatory Disclosures under GIPS:

  • If they have met all requirements using the appropriate compliance statement (verbatim!)
  • Definition of the firm and description of composites (with creation date) and benchmarks
  • If they are presenting gross of fees and any fees deducted
  • If presenting net of fees, if model or actual management fees are deducted
  • Currency used in presentation
  • Measure of internal dispersion
  • Fee schedule
  • Use and extent of leverage, derivatives and short positions
  • Date, description and reason for redefinition of firm or composites
  • Minimum asset levels for composites
  • Treatment of withholding taxes, dividends, interest and capital gains
  • Bundled fees and the types of bundled fees
  • Sub-advisors and the period in which they were used
  • Any portfolios that were not valued at month end or last business day
  • Use of subjective unobservable valuation inputs
  • If no benchmark is used and why
  • Custom benchmarks used; description, date of creation, components, weights and rebalancing process
  • Whether the performance of a past firm or affiliation is linked (only appropriate if substantially all decision makers came over to new firm, the process remains substantially the same, and the firm has documentation of the performance history).

Presentation and reporting guidelines under GIPS:

  • Total benchmark return for each period must be presented
  • Composite assets at the end of each year
  • Total firm assets or % of firm assets in each composite
  • Returns of less than one year cannot be annualized
  • % of composite in non-fee paying portfolios
  • % of composite in bundled fee portfolios
  • Five years of GIPS compliant performance or since inception if 5-years not available
  • Firms must add one year each year until at least ten years of data is reported

Be able to calculate the income return and capital return for real estate funds.

GIPS Valuation Hierarchy

Remember the valuation hierarchy for GIPS if the asset’s actual market value is not available. That is, you start with the top and if it isn’t an option you keep going down the list. The hierarchy is:

  • prices of similar assets in active markets
  • prices of similar assets in inactive markets
  • observable market inputs other than prices such as dividends, cash flows for pricing models
  • subjective or unobservable inputs like discount rates and projections
#3

Good summary- I was also getting sick of GIPS review today. Is it worth doing iten sets on GIPS today?

#4

@akthem

Nice summary. A “Like” from me.

#5

Do they ask questions pertaining to a prior year? Like 2005 and before? I’ve memorized what applies currently after Jan 1, 2010, but I feel it’s just too difficult to memorize what applied to prior years - particularly since its different for every item. If such kind of a question comes on the exam I’ll be stumped.

#6

I’ve seen many situations where the answer has to do with the year they are reporting in. I can’t remember all of this either so as a rule of thumb I just assume after 2010 is when everything changed (although in some situations it might be 2011)…

#7

Or even 2012 (frequency of real estate valuations)

#8

Important ones I’ve seen in Schweser’s notes and in TTs:

Since Jan 2005, it is required to use trade date accounting for performance measurement

Since Jan 2001, returns have to be calculated on a monthly basis

If non-compliant data for periods prior to 2000 is included, a disclosure is required in the presentation