I compiled a GIPS summary

Hi everybody,

After being very very frustrated with GIPS I started googling and essentially compiled a summary of different summaries + my own notes after doing the CFAI problems.
The dude that wrote this chapter in the book deserves a high five.
in the face.
with a chair.

Anyway, hope it helps
Credits go to: Marc Coward, krokodilizm, adaptprep

Good Luck with the exam

GIPS: Scope, objectives and key characteristics

  • Globally-recognized industry standard for performance reporting

  • Promote accurate and consistent performance data

  • Promote competition by lowering barriers to entry

  • Foster industry self-regulation

  • Voluntary global ethical standards for firms (NOT individuals)

  • Firm-wide compliance only (NO partial compliance)

  • Fair Representation of investment performance

  • Full Disclosure (no cherry-picking)

  • Integrity of Input Data is paramount

  • Intended to cover all asset classes (composite per strategy)

  • Composites must include ALL fee-paying, discretionary portfolios

  • (If non fee-paying discretionary portfolio report % it takes of composite)

  • Getting stricter over time

  1. Fundamentals of Compliance
  • Apply on a firm wide basis

  • Must be an investment firm, a subsidiary or a distinct business unit

  • If it markets as part of a group then it is not a distinct unit

  • If combination of compliant with non-compliant, latter must become compliant within one year

  • Assets farmed out to sub-advisors must be counted if the firm has discretion over choosing the sub-advisor

  • Discretionary = PM must have sufficient freedom to carry out his or her chosen strategy or style.

    • A portfolio is not “discretionary” if:
    • The client has veto power over trades
    • The client makes frequent large cash withdrawals
    • The manager cannot change allocations or risk exposure
    • The client relationship is “advisory-only”
  1. Input Data
  • Use fair value, trade date accounting (not settlement date) and accrual accounting
  • If period < 1/1/2001 report quarterly, otherwise monthly
  • If period > 1/1/2010 report monthly and after any large cash flows
  1. Calculation Methodology
  • Use TWR and link geometrically
  • For daily cash flows use [Modified Dietz method]
  • Calculate returns net of direct trading expenses
  • Custodian fees are not direct trading expenses
  • Bundled direct trading costs gross of fee: return reduced by entire bundled fee direct trading cost (if net of fee also reduced by investment management fee)
  • Use actual trading expenses, not estimated
  • Material changes must be disclosed
  1. Composite Construction
  • All actual, fee paying, discretionary portfolios in at least one composite
  • Do not include non-discretionary accounts
  • No simulated/modeled portfolios
  • Define composite (similar to IPS) and make available upon request
  • Timely inclusion of new portfolios in composite defined by firm but once defined be consistent in application
  • Firm can include single portfolio in more than one composite
  • If firm sets a minimum level of assets for inclusion in composite, don’t include porfolio if it falls below minimum level
  • Include terminated portfolios up the date of latest full measurement period
  • Historical performance of portfolio must remain in the original composite (no switching).
  • Include returns from cash and equivalents in total return calculations.
  • Carve-outs can’t be in composite unless separately managed with own cash balance (in this case disclose method of cash allocation + % it represents in composite)
  1. Disclosure
  • Use precise wording of compliance claim
  • Disclose use of subadvisors and the period used
  • Disclose composite date and description but not too broadly.
  • If using custom benchmark disclose components, weights and rebalancing
  • Disclose periods of non-compliance prior to 2000
  • Disclose number of portfolios in a composite, unless number is < 6
  1. Presentation and Reporting

GIPS return report must contain:

table

  • Year (look for not enough years presented based on composite inception date)
  • Composite return (net, gross or both)
  • Benchmark return
  • Number of portfolios must be listed if portfolios >6
  • Internal dispersion must be listed if portfolios >6 (st dev, high low, interquartile etc.)
  • Amount of Composite assets
  • Total firm assets (or % of total)

Special cases

  • report % of composite assets each year that are carve-outs, bundled fee, non-fee paying
  • If portfolio or composite is <1yr-old, returns cannot be annualized
  • performance track records must be linked if decision making process stays the same

underneath table

Correct GIPS compliance statement
Definition of the firm
Description of the composite
Composite creation date and complete list of composites (available upon request)
Policies for valuing portfolios, calculating performance and preparing presentations
Currency used
Description of benchmark
Minimum of 5 years return and going up to 10 years
In case of leverage: use and extent + characteristics
ID whether net or gross fees
Fee schedule
3 years ex post standard deviation or another measure of internal dispersion + explanation
There is no minimum or maximum number of portfolios that can be included in a composite.

  1. Real Estate
  • Real estate under GIPS=direct holdings in property,commingled real estate funds,private placements
  • Real estate under GIPS is NOT-> Publicly traded real estate securities, MBS
  • At fair value, otherwise seek third party valuation
  • Calculate income return and capital return separately
  • If period < 1/1/2012 external valuation at least every 36 months
  • If period > 1/1/2012 external valuations at least annually, unless stipulated otherwise
  • Present cumulative committed capital, since inception paid-in capital and distributions.
  • Also present ratios such as TVPI, DPI and RVPI
  1. Private Equity
  • PE under GIPS =Fixed-life, fixed-commitment private equity investment vehicles, including primary funds and funds-of funds
  • PE under GIPS is NOT->PE open-ended fund, real estate closed end funds, PE evergreen fund
  • Separate composites by strategy as well as vintage year
  • The same as Real Estate more or less
  • Market value = RVPI x paid in capital
  • TVPI = RVPI + DPI
  • Committed capital=paid in capital/PIC
  • % of paid in capital returns to investors=PIC
  1. Wrap Fee/Separately Managed Account (SMA) Portfolios
  • Include performance record in appropriate composites
  • Disclose for each period that the composite does not contain actual wrap fee
  • Wrap fee/SMA accounts must be reported net of the entire wrap fee

10.VALUATION PRINCIPLES

  • Fair Value Valuation must include accrued income

  • Follow this hierarchy of valuation:

    1. Objective, observable quoted market prices for active markets
    2. Quoted prices for identical or similar investments for inactive markets
    3. Any observable market based inputs
    4. Subjective unobservable inputs
  1. ADVERTISING GUIDELINES
  • Always include firm description
  • One-on-one presentations and individual client reports are not advertisements
  • You can just state that you are GIPS compliant without any further disclosure
  • If chose to also disclose performance then state composite and benchmark descriptions, fees (net or gross), currency used etc.
  • Present 1-3-5 year annualized composite returns plus period to date composite returns

Must be included in advertisement claiming GIPS compliance:

  1. Definition of the firm

  2. How a prospective client can obtain a GIPS-compliant presentation and composite descriptions

  3. Relevant GIPS compliance statement

  4. Composite description

  5. Composite total returns

  6. Gross-of-fees or Net-of-fees

  7. Total return for benchmark

  8. Benchmark description

  9. If no benchmark, explain why

  10. Currency used to express performance

  11. Presence, use and extent of leverage, derivatives and short positions

  12. Whether any pre-2000 non-GIPS-compliant data was used

  13. Any conflict between GIPS Advertising Guidelines and local laws or regulation

  14. VERIFICATION

  • 3rd party verification provides credibility, but not accuracy
  • Must be a single report for firm, not separate for specific composite
  • They verify that policies and procedures for composite definitions, performance calculation, and performance presentation are adequate.
  • This 3rd party can let another 3rd party do work, if they believe that 3rd party is qualified
  • You may sample portfolios to check work given 3rd party verification.
  • Verifiers keep records of their work, The company being verified keeps the data for everything that complies.
7 Likes

It should be < 6 or “5 and below”

Thanks fino_abama, I made the adjustments. Hope it’s ok now

1 Like

Legend! Thanks for this, just tucking into Ethic now so very handy!
I’ve finished my review of the nine other topics so if you fancy a ‘2-pager’ of summary notes for any topic just ask, kudos

Can’t believe I need to know all this to answer a couple questions on the subject…

…, if material

I’m guessing you’re a performance analyst :thinking:

Me? I am …

images

:sunglasses: As am I when I’m not fighting crime

1 Like

This has made a lot of my GIPs revision a lot easier. Very high quality work.
Many thanks