Global Investment Performance Standards (GIPS)

GIPS Required Disclosures

- Must disclose descriptions/definitions/calculation methods (e.g. use of derivatives/leverage, local law vs. GIPS, periods of non-compliance) - Must disclose changes and effective dates - Must disclose benchmark details

Reporting - Data and Disclosures

- Must include annual composite returns for at least 5 years historical performance (or since inception if <5) then continue to 10 years - # of portfolios (>5), amount of assets, % of firm assets in each composite - Measure of internal dispersion of individual portfolio returns (>5 yrs, if <5 no need!) - Must include 3-year ex post SD based on monthly returns -Must be in same currency Disclosures: - Not required to make negative assurance disclosures (if not using leverage then no disclose require) - Track record of a composite must stay where it was generated (unless management/strategy are unchanged and records exist)

Real Estate and Private Equity Basics

- RE Excluded: Publically traded securities, MBS, private credit - PE Excluded: Open-end and Evergreen funds - If a portfolio has RE and other investments, carve ou requirements apply

3 methods GIPS allow firms to calculate composite time-weighted returns:

Beginning Assets Weighting Beginning Assets Plus Weighted Cash Flows Aggregate Return

Does the firm's list of limited distribution pooled fund description required to include terminated pooled funds?

No

NoF minus Administration fees, including custody fees =

Client return

What are the 3 benchmarks?

1. Market indices 2. Target returns 3. Peer group universes

A money-weighted return (MWR) may be presented instead of a TWR if the firm controls the timing of external cash flows into the composite or pooled fund and the composite or pooled fund has one of the following characteristics:

closed-end, fixed life, fixed commitment, or illiquid investments are a significant part of the investment strategy.

Should Transaction costs (broker fee, exchange fees, bid-offer spreads) be included in the component of performance?

no - must be deducted from all performance calculations

What is NoF include?

reflects the deduction of both transaction costs and investment management fees (include carried interest)

If a pooled fund or composite meets the requirements for presenting an MWR, and the firm chooses to present an MWR then:

the firm must calculate annualized since-inception money-weighted returns using daily external cash flows.

GIPS Input Data Requirements

- All data needed to support performance presentation must be maintained - Fair value valuation is required - Valuation frequency is at least monthly or date of large ECFs, on last day of the month/year (calendar or business) with consistent start/end dates - Trade date accounting is required - Must use accrual accounting for fixed income

Discretionary Portfolios

- All fee-paying, discretionary portfolios must be included in at least one composite - Non-fee-paying, discretionary portfolios may be included in a composite (with disclosure of % of assets) - Non-discretionary portfolios can NOT be included in any composites

GIPS Advertising Guidelines

- Can present an abbreviated version of the GIPS AGs if full GIPS report is made available - Must contain general GIPS disclosures

Carve-Outs

- Carve-outs cannot be includes in composites unless they are actually managed separately with their own cash balance (sub-account) - Must also still be reflected in multi-asset composite

Closed-end Fund Reporting (Fund Metrics)

- Committed Capital and SI paid-in-capital - Distributions - TVPI = Total Value to SI Paid-in-Capital - DPI = Distributions to SI Paid-in-Capital - PIC = Paid-in-Capital to Committed Capital - RVPI = Residual Value to Paid-in-Capital

Constructing Composites (Mandates, Strategies, and Styles)

- Composites must be defined according to investment strategy or objective - Composite definition must be made reasonably specific and available upon request - Portfolios may not be moved in or out of composites except for specific documented situations

Wrap Fees/Separately Managed Accounts (WFSMA)

- Example: Client's investment manager (Sponsor) uses an external manager (Subadvisor) to manage some/all assets. Client pays Sponsor one-fee, which includes Subadvisor's management fee - If unable to separate trading expenses from wrapped fee then show returns net of full wrapped fee - Composites that include WFSMAs must be style-specific not sponsor-specific but s-s can be provided to sponsor without gross wrapped fee (for internally use only)

GIPS Valuation Principles

- Fair Value Hierarchy: 1. Market Value 2. Quoted prices (Identical or Comps) 3. Est. using market based inputs (ex. P/E) 4. Est. based on inputs not directly observable (DCFM) - Should follow intent of hierarchy not mechanical - Follow laws over GIPS (disclose)

Discretion - is the ability of the firm to implement its intended investment strategy.

- Firm that claims compliance with GIPS, must define its own definition, document it and must apply the definition consistently - Defined at firm level, but may also be defined by composite or asset class. -Non-discretionary portfolios must not be included in composites. Also must maintain support for the rationale. - GIPS encourage firms to include portfolios w/ various restrictions in different composites, where possible, rather than classifying them as non-discretionary.

GIPS Calculation Methodology Requirements (Composites)

- GIPS requires performance of similar accounts to be combined (e.g. investment objectives) - Can use BV method or BV + ECF method for TWRR, or Aggregate approach - All return calculations must be net of non-reclaimable withholding taxes

GIPS Presentation and Reporting Recommendations

- Gross of fees returns - Cumlative, equal-weighted mean/median, quarterly and/or monthly, and annualized returns - What you show for composite show for benchmark

Constructing Composites (Adding Portfolios and Terminating Portfolios)

- Must include only AUM within the defined firm - Cannot link to simulated/model portfolios - Additions must be timely and consistent - Terminations must be kept in historical through final period of reporting (no extrapolating < 1 year results) - Portfolios may not be moved b/t composites except for specific documented situations - Dealing with large significant CFs (temporarily ONLY): 1) Move cash to separate account and exclude 2) Exclude entire account OR do nothing, bc firms are not required to establish significant CF policies

GIPS Calculation Methodology Requirements (Rate of Return)

- Must use Time Weighted Rate of Return (TWRR) - Must include cash and cash equivalents - All return calculations must be gross-of-fees (i.e. net of trading costs) - When firm controls ECFs = must use IRR

Private Equity Requirements (General)

- Net-of-fees returns must be calculated with consideration given to management fees and carried interest - FoFs must returns must be net of partnership fees, fund fees, expenses, and carried interest - Vintage Year = Year which PE fund first calls capital - FoF/Primary Funds must disclose % of assets invested in Direct/Pooled Investments

After-Tax Returns

- Not required, but some tax-oriented firms provide to show competitive advantage - Two approaches to incorporating taxes: 1. Pre-Liquidation: Ignores unrealized gains/losses. Generally overstates after-tax return. 2. Mark-to-Liquidation: Assumes all gains are realized. Understates after-tax-return.

Private Equity Requirements (Fund Metrics)

- SI paid-in-capital - Cummulative Committed Capital - SI Distributions - TVPI = Total Value to SI Paid-in-Capital - DPI = Distributions to SI Paid-in-Capital - PIC = Paid-in-Capital to Committed Capital - RVPI = Residual Value to Paid-in-Capital

GIPS Recommended Discloses

- Should disclose methodologies and any changes - Should disclose sub-advisers

Closed-end Fund Reporting (General)

- Since inception rates of return (SI-IRR) must be reported using at least quarterly rates of return - Composites must contain accounts with similar objectives, stategy, etc. , and vintage year

GIPS Input Data Recommendations

- Valuation should be at every ECF (NOT just large) - Valuations should be provided by third-party - Accrual accounting required for equity dividends and management fees (if presenting as net-of-fees)

GIPS Real Estate Requirements and Recommendations

- Valuations: Internal (Quarterly), External (every 12 months) - Returns: Quarterly, net of transaction costs - Composite Returns: include component returns, asset weighting indv. returns, using time-weighted rates of return - Valuation methods: external valuation methods/frequency, material changes in in/ex valuation methods - Returns: Gross and/or Net of fees, must at least show gross component - Components = Total

GIPS Verification

- Verification by third-party recommended NOT required - NOT partial - Verifier must issue a statement as to why a firm was not compliant if this is the finding

Characteristics of GIPS

- Voluntary for investment firms (NOT for individuals) - Provide a minimum standard (NO partial compliance) - Must present a minimum of 5 years (or lifetime) historically and 10 years going forward - If GIPS conflicts with local law, defer to local law and disclose - Effective date for 2010 addition is 01/01/2011

GIPS Composite Time-Weighted Return Reports are required to include at least five years of annual composite results, or from inception if the firm or composite has a shorter track record, building up to a minimum of 10 years of compliant performance over time. Other required data elements include:

- benchmark returns that correspond to the presented composite results; -the number of portfolios in the composite, the composite assets, and the total firm assets as of each annual period end; -a measure of the internal dispersion of annual portfolio returns; and -the three-year annualized ex post standard deviation of both the composite and the benchmark.

What are the requirements for a Manager to use Money-Weighted Returns to calculate performance instead of TWR?

- the Manager controls the timing of external cash flows into the composite or pooled fund. - closed-end (not open of subs/reds) - fixed life - fixed commitment, or - illiquid investments as a significant part of the investment strategy

RVPI (residual value to paid in capital)

-Residual value/si PIC aka. unrealized multiple

Typical policies that a firm may establish would include new portfolios in a particular composite:

-at the beginning of their first full month under management, -following the first full month under management, -following two full months under management, -following the first full quarter under management, or -potentially a longer period, depending on the specific strategy.

How often should pooled funds that are not included in a composite be valued?

1. At least annually as of the calendar or fiscal year end 2. Whenever there are subscriptions to or redemptions from the pooled fund, and 3. As of the period end for any period for which performance is calculated

When calculating time-weighted returns for portfolios that are included in composites, all portfolio, except private market investment must be fair valued how often?

1. At least monthly as of the calendar month end or the last business day of the month, and 2. On the date of all large cash flow.

GIPS Objectives

1. Establish a global, industry-wide standard 2. Facilitate accurate presentation of information suitable for historical comparison 3. Encourage full disclosure and self-discipline 4. Encourage self-regulation

What are the 3 GIPS reports?

1. GIPS Composite Report - presentation for composite 2. GIPS Pooled Fund Report - presentation for a pooled fund 3. GIPS Asset Owner Report - an asset owner's presentation for a total fund or composite that contains all the related info required by the GIPS standards.

When calculation composite or pooled fund performance, firms must ensure that:

1. Only actual assets managed by the firm are included. 2. Accrued income is included in the beginning and ending portfolio value 3. Returns from cash and cash equivalents are included 4. Returns are calculated net of discretionary leverage (leverage created by the actions of the firm)

Internal Dispersion Measures

1. Range of returns 2. High and Low portfolio returns 3. Equal-weighted standard deviation 4. Asset-weighted std dev, wt at beg of period. 4. Inter-quartile range

Firms are required to maintain records that support their claim of compliance with the GIPS:

1. Records to support composite membership 2. All inputs to performance calculations 3. Copies of current and previously applied policies and procedures. Also firms that claim compliance are explicitly required to maintain all data and info to support all items included in GIPS reports, including statistical info and disclosures.

Vintage year - 2 methods

1. The year of the investment vehicle's first drawdown or capital call from its investors; or 2. The year when the first committed capital from outside investors is closed and legally binding

To produce a total return, portfolio valuations must include:

1. Transactions must be recorded using trade date accounting 2. Accrual Accounting must be used for fixed-income and others that earn interest income, EXCEPT, interest income on cash and cash equivalents. Firms are encouraged to use accrual accounting when capturing dividend income but are not required to do so. 3. value of cash and cash equivalents associated w/ portfolios must be included in total portfolio valuations.

What are the criteria to be met for performance from a past firm or affiliation to be presented for performance track record portability?

1. substantially all of the investment decision makers must be employed by the new or acquiring firm 2. The decision-making process must remain substantially intact and independent within the new or acquiring firm 3. The new or acquiring firm must have records to support the performance

The money-weighted return would be most likely to reflect the performance of both the client and the investment manager when: A. no external cash flows occur during the measurement period. B. illiquid investments are an insignificant part of the investment strategy. C. the client is responsible for and has control over cash flow timing decisions.

A - When no external cash flows have occurred, the time-weighted return and the money-weighted return will produce the same results, thus reflecting both the return of the client and the investment manager

An investment manager receives notification on 25 September that a client wishes to close their account and withdraw their assets as of the end of October. Assuming the firm calculates composite performance monthly, the last measurement period that the client's portfolio should be a constituent of the relevant composite is most likely: A. August. B. September. C. October.

A is correct. Once a firm receives notification of a pending termination, the firm's ability to manage the portfolio freely is generally lost and discretion would be considered revoked. For firms that calculate composite performance on a monthly basis (as is the case here), the last full measurement period is the last full month (August, in this case) that a terminating portfolio was under discretionary management.

Upon request, firms must provide to prospective clients a complete list of: A. composite descriptions. B. pooled fund descriptions for limited distribution pooled funds. C. pooled fund descriptions for broad distribution pooled funds.

A is correct. The complete list of composite descriptions must be provided to prospective clients upon request. The list of pooled fund descriptions for limited distribution pooled funds must be provided to any limited distribution pooled fund prospective investor who requests it, although it is not required that the list of pooled fund descriptions for limited distribution pooled funds be made available to prospective clients. Firms are required to maintain a list of broad distribution pooled funds and provide it upon request to broad distribution pooled fund prospective investors, but the list is not required to include descriptions.

A firm that manages large-cap growth portfolios takes on a new client who requests that no tobacco company stocks be purchased for the portfolio. Which of the following is an acceptable approach for the firm to consider? I. Classify the portfolio as non-discretionary. II. Create a new composite defined to include socially responsible large-cap growth portfolios. III. Include the portfolio in the same composite as portfolios that do not have tobacco restrictions.

All 3

TWR for pooled funds that are not included in composite are only required toe be calculated when?

Annually through the calendar or fiscal year end or the last business day of the year. Sub-period returns must then be geometrically linked to calculate monthly or longer period returns.

How many years does the list of composite descriptions must include the terminated or discontinued?

At least 4 year following the termination date

A properly constructed composite: A. excludes terminated portfolios. B. includes new portfolios on a timely and consistent basis. C. includes either segregated accounts or pooled funds, but not both.

B is correct. New portfolios must be included in composites on a timely and consistent basis. Terminated portfolios must remain in composites during the periods when they were under discretionary management. A composite may include both segregated accounts and pooled funds.

Firms are required to make every reasonable effort to provide a: A. GIPS Asset Owner Report to all prospective clients B. GIPS Pooled Fund Report to all prospective clients C. GIPS Composite Report to all prospective clients

C GIPS Pooled Fund Reports (or a GIPS Composite Report that includes the particular pooled fund) must be delivered to prospective investors in limited distribution pooled funds but not necessarily to prospective clients. GIPS Asset Owner Reports must be delivered to an asset owner's oversight body.

A firm's policies and procedures must address how the firm adheres to each: A. requirement and recommendation of the GIPS standards. B. requirement of the GIPS standards, but not the recommendations. C. requirement of the GIPS standards and any recommendations the firm has chosen to adopt.

C is correct. A firm's policies and procedures must address each requirement of the GIPS standards as well as any recommendations that the firm has chosen to adopt. Recommendations that the firm has not chosen to adopt do not necessarily need to be addressed.

Options provided in the GIPS standards for addressing significant cash flows include: A. temporarily removing portfolios from composites that experience external cash flows that have a material impact on performance. B. temporarily removing portfolios from composites that experience external cash flows that exceed the firm's definition of a large cash flow. C. moving assets related to the external cash flow to a temporary new account.

C is correct. The use of temporary new accounts is one of the options outlined in the GIPS standards for handling significant cash flows. Firms may also establish a significant cash flow policy for temporarily removing portfolios that experience significant cash flows, but the policy must be based on the size of the cash flow, not the degree to which performance is impacted. Also, a significant cash flow is different from a large cash flow. Large cash flows should not initiate the removal of portfolios from composite; instead, they should trigger the portfolio to be valued on the date of the cash flow.

Criteria that may be factored into the definition of a composite are:

Composites must be defined according to investment mandate, objective, or strategy - Asset class - The use of specific instruments or investment techniques (derivatives, leverage, hedging) -Targeted risk or return metrics (tracking error or alpha) - Investment constraints or restrictions impose by the client (social responsibility)

If a firm identifies a material error in a GIPS Report the firm is not required to provide the corrected GIPS Report to?

Former clients Former investors Former prospective clients Former prospective investors

GIPS standards require that performance calculations reflect total return

Includes: Realized G/L Unrealized G/L Income for the measurement period

Why is Aggregate Return method different?

It combines all the assets and external cash flows for the portfolios included in the composite to calculate the composite in the same manner as an individual portfolio. It does not use returns calculated at the portfolio level. Calculates the composite return independent from the returns of the underlying portfolios.

are administration fees (custody fees, accounting fees, auditing fees, and other related fees) require to be deducted from either GoF or NoF performance?

No

If portfolio has less than 12 months of performance history, then MUST NOT annualize the SI-MWR. Instead use the non-annualized SI-IRR formula when calculating the IRR:

Rate Non SI-IRR = [(1+rsi-IRR) power TD/365] - 1 rsi-IRR = annualized SI IRR TD = Total # of calendar days in the measurement period

DPI (RE and PE)

Since inception distributions divided by since inception paid-in capital. AKA realization multiple

Compare and contrast TWR and MWR

TWR - removes the effect of external cash flows - generally be thought of as the return attributed to the investment manager. MWR: - directly impacted by external cash flows when they occur and how large they are - is the return that an investor actually experiences - May reflect both the return of the client and manager when manger controls the timing of external cash flow. Note: during periods when no external cash flows occurred, TWR = MWR

GIPS standards requirements differences b/t Asset Owners and Firms before compliance can be claimed:

The length of the track record must be initially presented in compliance w/ GIPS before compliance can be claimed: Firm - at least 5yrs Asset Owners - 1yrs of since inception Both are required to build up to minimum of 10yrs of compliant performance over time.

TVPI

Total value/SI paid-in-capital

Beginning Assets Weighting Method

a composite return method that weights the underlying portfolio returns using beginning of period values R ^BV= Sum (BV x return of portfolio for period)/sum BV