GIPS

Question 1

The Global Investment Performance Standards (GIPS)

Answer 1

• Are a globally recognized set of standards for calculating and presenting investment performance.
• They are ethical in nature, based on fair representation and full disclosure, and are entirely voluntary.

Question 2

The GIPS 3 Chapters

Answer 2

• GIPS Standards for Firms
• GIPS Standards for Asset Owners: an endowment
• GIPS Standards for Verifiers

Question 3

Claim Compliance

Answer 3

• Investment firms must follow all GIPS requirements as to how returns are calculated and presented in their performance presentation (GIPS Report).
• The standards also include recommendations in line with industry best practice which are optional.
• Compliance can only be claimed on a firm-wide basis. It cannot be claimed for a specific composite or portfolio alone.

Question 4

Composite

Answer 4

Is a group of portfolios with a similar investment mandate, objective, or strategy.

Question 5

Prospective Client

Answer 5

A person or entity with an interest in a segregated account, and a person or entity with an interest in a pooled fund as a prospective investor.

Question 6

Composites

Answer 6

• Composites are collections of 1 or more portfolios with a similar strategy, objective, or investment mandate
• All actual fee-paying discretionary segregated accounts must be included in at least one composite.
• Actual fee-paying discretionary pooled funds must be included if they meet the composite definition.
• Non-fee-paying portfolios may be included if disclosed, whereas non-discretionary portfolio should not
• A firm is not required to create composites for all pooled funds.
• Cannot include portfolios with different strategies, objectives, or mandates in the same composite.

Question 7

5 Objectives of the GIPS standards

Answer 7

1. Promote investor interests and instill investor confidence.
2. Ensure accurate and consistent data.
3. Obtain worldwide acceptance of a single standard for calculating and presenting performance.
4. Promote fair, global competition among investment firms.
5. Promote industry self-regulation on a global basis.

Question 8

Local Laws and Regulations Conflicts

Answer 8

Firms that present performance that complies with local laws and regulations but conflicts with the GIPS standards must disclose the discrepancy in the GIPS Report.

Question 9

The GIPS Standards for Firms

Answer 9

1. Fundamentals of Compliance
2. Input Data and Calculation Methodology
3. Composite and Pooled Fund Maintenance
4. Composite Time-Weighted Return Report
5. Composite Money-Weighted Return Report
6. Pooled Fund Time-Weighted Return Report
7. Pooled Fund Money-Weighted Return Report
8. GIPS Advertising Guidelines

Question 10

Definition of the Firm

Answer 10

• Investment firm, its subsidiary, or a division held as a distinct business entity may claim compliance.
• A distinct business entity must retain discretion over managed investments, maintain organizational separation (different legal entity), and functional segregation

Question 11

Total Firm Assets

Answer 11

• Include the aggregate all assets under the firm’s investment responsibility, regardless of discretionary or fee paying.
• Should include those managed by a sub-advisor selected by the firm,
• Do not include advisory-only assets (provides recommendations to, no trading authority), or uncalled committed capital.

Question 12

Alter Historical Composite Results

Answer 12

Apart from correcting errors, firms may not alter historical composite results.

Question 13

Discretionary

Answer 13

• All actual, fee-paying, discretionary segregated accounts must be included in at least one composite.
• Discretionary Fee-paying pooled funds must also be included in at least one composite
• If the investment manager is free to implement the intended investment strategy
• Firms are required to document and consistently apply their definitions.

Question 14

Potentially Render an Account Non-Discretionary

Answer 14

Restrictions that Potentially Render:
* Restrictions on selling the stock of the client’s employer
* Restrictions on the use of derivatives in a portfolio where a critical component
* Retention of low-basis stock to avoid capital gains
* ESG-related prohibition on investing in certain sectors
* Legal restrictions may prohibit certain types of transactions in particular types of portfolios
* Imposed by a client’s contributions and withdrawals.

Question 15

Simulated Theoretical Performance

Answer 15

• Firms may not link simulated or model portfolios to actual results reported for a composite; only actual performance.
• May be shown as supplemental information but not be linked to composite results.
• Firms may include their own actual proprietary account results in composites subject to the reporting requirements related to non-fee-paying accounts.

Question 16

Can Non-Fee-Paying Accounts be Included in Composites

Answer 16

Discretionary non-fee-paying segregated accounts may be included in composites, as long as the proportion of the composite made up of non-fee-paying accounts is disclosed.

Question 17

Fundamentals of Compliance

Answer 17

• Should show a minimum of 5-years of GIPS compliant data, or since firm inception
• Document its policies and procedures adhering to GIPS requirements and recommendations
• Should provide a GIPS Report to all prospective clients when they become prospective clients, and provide an updated report at least every 12 months
• The benchmark used in the report must reflect the investment strategy of the composite
• The firm should maintain a list of composites and pooled funds
• The firm must retain all data to support GIPS Reports.

Question 18

Return Calculation Methodologies

Answer 18

• Time-weighted return (TWR) methodology: GIPS standards generally require to use this
• Money-weighted return (MWR) methodology.

Question 19

Time-Weighted Return (TWR)

Answer 19

• Calculates periodic returns whilst adjusting for external cash flows.
• Composite portfolios valuations and returns must be performed at least monthly (private market must be valued at least quarterly).
• If returns are not calculated daily, it should be performed on the day of a large cash flow.
• Firm should define a ‘large cash flow’ in absolute dollar terms or as a percentage of composite assets.
• Pooled portfolios not contained in composites should be valued, returns calculated at least annually.
• Valuations and returns should also be calculated if there is a significant external cash flow.
• Periodic return is based on the increase in portfolio value (no external cash flows)

Question 20

Money-Weighted Return (MWR)

Answer 20

Firms can however choose to use when the firm has control over the timing and size of external cash flows and either
* The portfolios are fixed-life, closed-end, or fixed-commitment
* A significant proportion of the portfolio is composed of illiquid investments

Question 21

Returns Less Than a Year

Answer 21

Returns over periods of less than a year should not be annualized and presented as annual returns.

Question 22

Valuation for the portfolio

Answer 22

• Is recommended on the date of all external cash flows.
• If daily returns are not calculated, returns adjusted for daily weighted external cash flows must be calculated using either the Modified Dietz method or Modified IRR

Question 23

Fees and Expenses

Answer 23

Returns must be calculated after transaction costs:
* Brokerage commissions
* Exchange fees and taxes
* Internal or external trading spreads
* Banking, legal, advising, and financial fees associated with private investments
* Custody fees should not be considered transaction costs
* Estimated transaction costs can be used only when actual transaction costs are not known.

Question 24

Bundled Fees

Answer 24

Where an investment manager offers a comprehensive package including bundled fees
* Gross-of-fee returns: must be reduced by the full amount of the bundled fee or the portion of the bundled fee including transaction costs.
* Net-of-fee returns: must be reduced by the full amount of the bundled fee or the portion of the bundled fee including transaction costs and investment management fees.

Question 25

Fair Value Valuation

Answer 25

**If Available:** Use the objective, observable, unadjusted market price quoted on the measurement date in an active market. **If Not Available:** 1. Quoted prices for similar investments in active markets 2. Quoted prices for identical or similar investments in markets that are not active 3. Observable market-based inputs for the investment other than quoted prices. 4. Subjective, unobservable inputs.

Question 26

Returns from Cash and Cash Equivalents

Answer 26

Must be included in all return calculations, even if the firm does not control the specific cash investment(s)

Question 27

Methods for Calculating Composite Returns

Answer 27

**The 3-Acceptable Methods:** * The average portfolio returns weighted by the beginning-of-period portfolio values. * The average portfolio returns weighted by the beginning-of-period portfolio values adjusted for external cash flows during the period. * The ‘Aggregate Return’ method on a single Modified-Dietz return calculation on the entire portfolio.

Question 28

Inclusions of New Portfolios

Answer 28

* Composites must include new portfolios on a timely and consistent basis after each portfolio comes under management. * The composite must be include on a consistent basis even if it is expected to take an extended period * Included in the composite as of the first full measurement period that the assets are fully invested, the key; must apply policy consistently.

Question 29

Excluding Portfolios

Answer 29

* Must include portfolios in composites through to the last day of the last full month they were managed. * Loss of discretion or a client terminates a relationship. * Historical performance of terminated portfolios must remain in the composite performance. * Prevents switching portfolios among composites unless the composite definition has changed * Firms may remove a portfolio from a composite due to its value falling below a minimum asset level. * Historical performance for portfolios removed from a composite must remain with the composite. * Minimum asset levels may be changed prospectively, but may not be changed retroactively to include or exclude portfolios.

Question 30

Temporary New Account

Answer 30

* When subjected to significant cash flows, create a temporary new account, which is not included in any composite. * Once the strategy can be implemented for these cash flows, the temporary account can be transferred into the client's main portfolio where it may be treated as an external cash flow. * Alternatively, the firm may temporarily remove the portfolio from its composite.

Question 31

Presentation and Reporting

Answer 31

**Firms claiming GIPS compliance:** * For GIPS Time-Weighted Reports, the GIPS standards require initially at least 5-years of annual data for all compliant composite presentations * Extended each year until they present at least 10 years of data. * Firms with less than 5-years of data on a composite must present their available performance results.

Question 32

Core Elements of a GIPS Report

Answer 32

* Composite and benchmark annual returns for each period reported * Value of assets in the composite at the end of each period (6 or greater) * Value of total firm assets at the end of each period * Number of portfolios for each period * The internal dispersion of individual portfolio returns for each period. The firm has discretion as to how this dispersion is calculated. * Where monthly data is available, the external dispersion of the composite and benchmark over time must be included, presented as the 3-year annualized standard deviation based on monthly data.

Question 33

Portability of Performance

Answer 33

**Firms may link performance of a past firm or affiliation** **4 conditions are ALL** **met**: 1. Substantially all the investment decision-makers from the past firm or affiliation are employed by the new or acquiring firm 2. The decision-making process remains independent and in place at the new or acquiring firm 3. The new or acquiring firm can support the reported performance with appropriate documentation 4. There is no gap in the performance track record If only the first 3 conditions are met, then the performance of the past firm may be used by the acquiring firm, however it cannot be linked. A GIPS compliant firm that acquires a non-GIPS-compliant firm has 1-year to bring any non-compliant assets into compliance with GIPS.

Question 34

Verification

Answer 34

* Process of an independent third-party assessment of a firm's compliance with the GIPS standards * Cannot ensure the accuracy of any particular presentation, it can provide confidence * The GIPS standards recommend but do not require verification. * A firm must not state that it has been verified unless the verifier has issued a verification report indicating that it has met the GIPS requirements * A verification report attests to firmwide compliance; cannot be issued for some subset of composites.

Question 35

Fee Schedule is it required

Answer 35

GIPS requires a fee schedule to be disclosed in a compliant presentation.

Question 36

Can a Firm Show Gross or Net of Fees

Answer 36

While a firm can choose to show performance either gross or net of fees, the Standards recommend that performance is shown gross.

Question 37

Is it a Requirement that a Firms Revalue After an External Cash Flow

Answer 37

It is a recommendation, not a requirement, that firms revalue portfolios whenever an external cash flow occurs. The requirement under GIPS is to revalue the portfolio based on the firm's revaluation criteria. The definition of large is left to the firm and can relate to an absolute or percentage of the fund value, as is the case here.

Question 38

Internal Dispersion

Answer 38

Is measured by the range (highest return minus lowest return) of annual returns of those portfolios that are included in the composite for the full year. Is a requirement.