Reading 4: Introduction to the Global Investment Performance Standards (GIPS)

An Investment Management firm that does not adopt the GIPS standards could mischaracterize its overall performance by presenting a performance history A) That includes terminated portfolios B) Composed of a single top performing portfolio C) For an investment mandate over all periods since the firm's inception

B

T or F: ALL investment management firms must comply with the GIPS standards.

FALSE. Complying is VOLUNTARY. Typically not required by legal or regulatory authorities.

9 Structures of the GIPS Standards

Fundamentals of Compliance, Input Data, Calculation Methodology, Composite Construction, Disclosure, Presentation and Reporting, Real Estate, Private Equity and Wrap Fee/Separately Managed Acct (SMA) Portfolios.

T or F: Plan sponsors that manage assets CANNOT claim compliance with the GIPS.

F. If they actually manage assets they can make a claim of compliance.

T or F: Firms can perform their own verification tests

F. Only an independent third party can perform verification.

Why was the GIPS Standards created?

In the past, the investment community had great difficulty making meaningful comparisons on the basis of accurate investment performance data. Several performance measurement practices hindered the comparability of performance returns from one firm to another, while others called into question the accuracy and credibility of performance reporting overall.

Who benefits from the GIPS standards?

Investment Management firms and Prospective Clients. Investors have a greater level of confidence in the integrity of the performance presentations and the GIPS compliant firm is enabled to participate in competitive bids against other compliant firms through the world.

What is a composite? What must it include?

Is an aggregation of one or more portfolios managed according to a similar investment mandate, objective, or strategy. Must include all actual, fee-paying, discretionary portfolios managed in accordance with the same investment mandate, objective, or strategy.

GIPS Standards: What is it?

Practitioner driven set of ethical principles that establish a standardized industry wide approach for investment firms to follow in calculating and presenting their historical investment results to prospective clients. GIPS ensure fair representation and full disclosure of investment performance. This is to avoid misrepresentations of performance and to communicate all relevant information that prospective clients should know in order to evaluate past results.

What are some misleading performance measurement practices?

Representative Accounts: Selecting top performing portfolio to represent the firm's overall investment results for a specific mandate. Survivorship Bias: Presenting an "average" performance history that excludes portfolios whose poor performance was weak enough to result in termination of the firm Varying Time Periods: Presenting performance for a selected time period during which the mandate produced excellent returns or out-performed its benchmark- making comparison with other firms' result difficult or impossible.

T or F: Compliance is a firm wide process that cannot be achieved on a single product or composite. A firm has only two options: fully comply with ALL requirements of the GIPS standards and claim compliance through the use of GIPS standards and not claim compliance with, or make reference to, the GIPS standards.

T.

T or F: Each composite of a GIPS compliant firm must consist of portfolios managed according to a similar investment strategy.

T. A composite is an aggregation of one or more portfolio managed according to similar investment mandate, objective, or strategy.

T or F: Only Investment management firms that actually manage assets can claim compliance with the Standards.

T. Plan sponsors and consultants cannot make a claim of compliance unless they actually manage assets for which they are making a claim of compliance. Similarly, software (and the vendors who supply software) cannot be "compliant". Software can assist firms in achieving compliance with the GIPS stands (by calculating performance in a manner consistent with the calculation requirements of the Standards) but only an investment management firm can claim compliance once the firm has satisfied all requirements of the Standards.

Verification Tests

Whether the investment firm has complied with all the composite construction requirements of the GIPS standards on a firm wide basis and whether the firms' policies and procedures are designed to calculate and present performance in compliance with the GIPS standards.