Gips, The tricky stuff, the stuff broken down by year, the calcs, and whatever else I thought was wierd or whatever.

CFA Level III Portfolio Management
#1

This is not intended to be all inclusive but I tried ot at least get all the dates I can find, all of the fee related confusion etc…

Feel free to take whatever you want. As a disclosure for ethical reasons, lots of this information is almost word for word from this year and last years Schweser notes. Some form the CFA text as well.

Hope somene gets something out of it.

Gips

  • All returns must be calculated after the deduction of actual trading expenses (gross of fees returns)
    • Brokerage commissions, regulatory fees, duty, tax associated with transaction
  • Net of fees includes management and custody fees.

Statements:

  • claims compliance with the Global Investment Performance Standards (GIPS ®) and has prepared and presented this report in compliance with the GIPs standards. has not been independently verified

For firms that are verified:

[Insert name of firm] claims compliance with the Global Investment Performance

Standards (GIPS®) and has prepared and presented this report in compliance with the

GIPS standards. [Insert name of firm} has been independently verified for the periods

[insert dates}. The verification report(s) is/are available upon request. Verification assesses

whether (I) the firm has complied with all the composite construction requirements of

the GIPS standards on a firm-wide basis and (2) the firms policies and procedures are

designed to calculate and present performance in compliance with the GIPS standards.

Verification does not ensure the accuracy of any specific composite presentation.

For composites of a verified firm that have also had a performance examination:

[Insert name of firm] claims compliance with the Global Investment Performance

Standards (GIPS®) and has prepared and presented this report in compliance with the

GIPS standards. [Insert name of firm] has been independently verified for the periods

[insert dates]. Verification assesses whether (I) the firm has complied with all the

composite construction requirements of the GIPS standards on a firm-wide basis and (2)

the firms policies and procedures are designed to calculate and present performance in

compliance with the GIPS standards. The [insert name of composite} composite has been

examined for the periods [insert dates]. The verification and performance examination

reports are available upon request.

Advertising guideline statement

[insert name of firm] claims compliance with the global investment performance standards (GIPS®)

For Composites

  • At least five years of annual performance (or a record for the period since firm or composite inception if the firm or composite has been in existence less than five years) that meets the requirements of the GIPS standards; after presenting five years of performance, the firm must present additional annual performance up to a minimum of ten years.

  • Annual returns for all years clearly identified as gross- or net-of-fees.

  • For composites with a composite inception date beginning on or after January 1, 2011, when the initial period is less than a full year, firms must present returns from the composite inception through the initial year-end.

  • For composites with a termination date of January 1, 2011, or later, returns from the last annual period through the termination date.

  • Annual returns for a benchmark, which reflects the mandate, objective, or strategy of the portfolio.

  • The number of portfolios in the composite at each year-end. If the composite contains five portfolios or less , the number of portfolios is not required.

  • The amount of assets in the composite at the end of each annual period.

  • Either total firm assets or composite assets as a percentage of firm assets at each annual period end.

  • A measure of dispersion of individual portfolio returns for each annual period.If the composite contains five portfolios or less for the full year, a measure of dispersion is not required.

Internal Dispersion Methods

  • Range and High Low
    • Simplest and most easily understood
    • Advantage is its simple to calculate and understand
    • Disadvantage is they can be skewed easily
  • Interquartile range
  • Range in between the bottom 25% and top 25% : middle 50%
  • Equally weighted Standard Deviation
  • Asset weighted Standard Deviation
  • most widely accepted

Dates:

January 1, 2011

  • Portfolios must be valued at fair value
  • firms must disclose and describe any known material differences in the exchange rates or valuation sources used among the portfolios within a composite and between the composite and the benchmark
    • prior: For periods prior to January 1, 2011, firms must disclose and describe any known inconsistencies in the exchange rates used among the portfolios within a composite and between the composite and the benchmark.
  • Firms must disclose if the valuation hierarchy differs from the recommended GIPS hierarchy
  • Firms must disclose if use of subjective unobservable inputs were used in valuing the portfolios is the use of those inputs are material to the composite
  • For composites with a termination date of January 1, 2011, or later, returns from the last annual period through the termination date.
  • For composites with a composite inception date beginning on or after January 1, 2011, when the initial period is less than a full year, firms must present returns from the composite inception through the initial year-end.’
  • Firms must present as of each annual period end the three year annualized ex post standard deviation of the composite and benchmark and an additional ex post risk measure if standard deviation is inadequate

January 1, 2012

  • Real Estate – must have an external valuation done at least every 12 months by an outside trained professional, or if a client agreement states otherwise at least every 3 years

Prior to January 1, 2012

  • Real Estate – must have an external valuation done at least every 3 years

January 1, 2011

  • After this date, firms must use fair value
  • Real Estate
    • income and capital component returns must be calculated separately using geometrically linked time weighted rates of return
    • Must disclose material changes to valuation policies or methods.
    • Must disclose material differences between external valuation and the valuation used in reporting performance and the reason for the difference
    • Must disclose if component returns are adjusted so that the sum of the income and capital returns equals the total return.
  • Private Equity
  • Private Equity must be valued at fair value
  • The SI-IRR must be calculated using daily cash flows stock distribution must be valued at the time of distribution and included as a cash flow.
  • For fund of fund composites, firms must present the SI-IRR of the underlying investments grouped by vintage year as well as the other measures required by standard (RVPI, etc). All measures must be presented gross fund of fund investment management fees and of the most recent annual accounting period
  • Fund of funds composites must present the percentage of composite assets invested in direct investments
  • Primary fund composites must present the percentage of composite assets invested in fund investment vehicles (instead of direct investments) as of the end of each annual period end

Prior to January 1, 2011

  • Private Equity
    • Must disclose the frequency of cash flows if daily cash flows are not used in calculating the SI-IRR prior to January 1, 2011

January 1, 2010

  • Portfolios must be valued at least monthly and on the date of all large external cash flows
  • Portfolios must be valued as of month end or the last business day of the month
  • Modified Dietz allowed until this date
  • Firms must calculate composite returns by asset weighting the individual portfolio returns at least monthly
  • Carve outs must not be included in a composite unless the carve out is actually managed separately with its own cash balance
  • Real estate - must be valued quarterly at end of or on last business day of each quarter.

Prior to January 1 2010:

  • If carve outs are included in a composite firms must disclose the policy used to allocate cash to the carve out
  • Firms must disclose if any portfolios were not valued at calendar month end or on the last business day of the month

January 1, 2008

  • Real Estate – must be valued quarterly

Prior to January 1 2008

  • Real Estate – must be valued at market value once every 12 months

January 1, 2006

  • Composites must have consistent beginning and ending annual valuation dates
  • Firms must use approximated rates of return that adjust for daily weighted cash external flows
  • Firms must calculate composite returns by asset weighting the individual portfolio returns at least quarterly
  • Firms must disclose the use of a subadvisor and the periods subadvisor was used
  • If a composite includes carve outs, the presentation much include the percentage of the composite that is comprised of carve outs for each annual period
  • Real estate - Firms must disclose any periods of non-compliance for performance presented prior

to January 1, 2006.

January 1 2005

  • must use trade date accounting
  • Original Dietz method permitted until this date

Pre 2005

  • settlement date allowed and doesn’t need to be recalculated

January 1 2001

  • Portfolios Valued monthly

Prior to January 1, 2001

  • Portfolios Valued Quarterly

Prior to January 1, 2001

  • Noncompliant periods allowed, but must be disclosed.

Original Dietz Method

EMV-BMV-CF

BMV + .5CF

Modified Dietz

EMV-BMV-CF W= CD – Di CD – number of days

BMV + [ƩWi x CF] CD D – day cash flow occurred

Real Estate Calcs

Capital Employed =C0 + Ʃ(CFxWi)

Capital Return

Ending – Beginning – Capex +Sales

Capital Employed

Income Return

Gross Investment Income – Non Recoverable Expenses - Debt interest – Property Taxes

Capital Employed

Private Equity

  • Valuations must be prepared annually, but recommended quarterly
  • Firms must present both gross of fees and net of fees since inception IRR
  • All returns must be calculated after deducting transaction expenses for the period
  • Net of Fees must be calculated with consideration given to management fees and carried interest
  • Must disclose if any other fees are deducted in addition to transaction fees for gross of fees
  • Must disclose if any other fees are deducted in addition to investment management fees and transaction expenses when presenting net of fees returns
  • For fund of funds, all returns must be net of all partnership fees, fund fees, expenses, and carried interest.
  • Required reporting
    • Since Inception Paid In Capital
    • Cumulative Committed Capital
    • Since inception distributions
      • Total Value to paid in Capital (investment multiple or TVPI)
      • Cumulative distribution to paid in capital (realization multiple or DPI)
      • Paid in capital to committed capital (PIC Multiple)
      • Residual value to paid in capital (RVPI)
  • Valuation Hierarchy
  • Market Transaction
  • Market based Multiples
  • Discounted Cash Flows.

GIPS Valuation Hierarchy

  1. Objective observable unadjusted market prices for similar investments in active markets
  2. Quoted prices for similar or identical investments in non-active markets
  3. Market Based inputs other than quoted prices that are observable for the investment
  4. Subjective unobservable inputs
#2

Thanks Rolo, it’s a great help for someone like me. Have still not started GIPS.

#3

I just hit it today, i powered through all this crap and I’m gonna do EOCs here in a minute, them Im done with it. other than reviewing these notes and the point by point list of provision at the end of the schweser chapter jsut prior to the exam

#4

Great post: are we positive on deducting custody fees in net returns?

#5

I could be wrong, but is there some net of net where custody comes out? it doesn’t come out of gross.

Im not gonna get my feelings hurt if someone comes up with something I made an error on. it doesn’t help me or others if the info isn’t right

#6

a note on trade date accounting

  • must use trade date accounting FIRM HAS 3 DAYS (T+1,T+2, T+3) to record trade
#7

Custody fees need to be deducted at the gross returns level.

Only the IM expenses come at the net returns level.

#8

Page 193 schweser, “all returns must be calculated after the deduction of the actual trading expenses incurreded during the period, estimated trading expenses are not permitted”

Direct trading expenses include brokerage commissions, regulatory fees, and duty and/or tax associated with a transaction. Indirect trading expenses include bid/ask spread. Custody fees are not considered direct trading expenses (even if they are charged at a specified rate per transaction), and trading expenses may not be estimated.

in the example page 225

Performance results are presented gross of management, wrap, and custodial fees but after all trading commissions.

the only thing the critique of the disclosure said was

When wrap fees are present, performance results should have been presented net of all wrap fees.

In the compliant presentation, page 228 it says

Performance results are presented before management and custodial fees but after all trading commissions. The management fee schedule is contained in the appendix to this report.

page 320 CFAI text

gross-of-fees returns are useful for prospective clients who wish to evaluate a firms investment skill without regard to investment management fees, which may be negotiable, or administrative fees, which may not be under the managers control. (Administrative fees, defined as all fees other than trading expenses and the investment management fee, could include custody, accounting, auditing, consulting, performance mea- surement, and legal fees, among others.)

Page 292 CFA text

ion in this context that, as the GIPS Glossary makes clear, custody fees should not be considered direct trading expenses, even when they are charged on a per-transaction basis. From a performance measurement per- spective, although trading costs are unavoidably part of executing an investment strategy, they will naturally be higher in a portfolio with relatively greater turnover. External cas

It appears to me that Custody fees arent part of the gross of fees, agreed or am i missing something?

#9

^ Agree

#10

We all agree they don’t come out of gross… I’m questioning that they come out of net.

#11

Mark, when else would they come out?

#12

They wouldn’t

#13

I read the text to say its an investment management fee which would come out of the net.

#14

Mike Douglas wrote

Because the manager typically has no say in who is providing administrative services, such as custody. The following is excepted from the GIPS guidance statement on fees:

“In general, there are three main types of fees and/or costs: investment management fees, trading expenses, and administrative fees. Administrative fees are defined as all fees other than trading expenses and investment management fees and include custody fees , accounting fees, auditing fees, consulting fees, legal fees, performance measurement fees, and other related fees. In some situations, the only fees that the firm controls are the investment management fees and the trading expenses (i.e., the actual cost of buying or selling investments). Therefore, only the investment management fees and the trading expenses should impact the firms returns. Even though custody fees are a necessary additional cost of owning a portfolio, many investment managers are not involved in the selection of the custodian or in the negotiation of the custody fees. Accordingly, in order to promote comparability, custody fees should not be reflected in (i.e., should not reduce) the firms returns.”

#15

So I just read an EOC that says it is reccomended to present gross of fees, but you can do net of fees too and you have to disclose which one.

So what is the REQURED way to calculate fees? Can it be either way but you HAVE to include one or the other and it has to be disclosed?

#16

Correct. Plus you have to diclose additional stuff depending if you are presenting results net or gross of fees:

Gross: any other fee deducted in addition to direct trading expenses.

Net: same as gross + if model or actual management fees are used + if net of performance fees

#17

FLX,

Is there a requirement for one or the other (net or gross), or do you just pick which one and disclose?

#18

You can pick which one you want but as you said it is recommended to present gross returns

#19

I think it can be either Gross of fess or net of fees…but if Net is shown then Gross is recommended…

#20

1, custody fees are part of admin fees, not a trading expsense. 2, the manager would make its performance look as good as possible, so it has no interest in deducting custody fees in the report. In wrap-fee/SMA accounts, it’s net of all wrap fees(incl custody fees) in general, except for targeting the existing sponsors. Overall, net of custody fees is not required, unless it’s in bundled fees.