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IFT Notes for Level I CFA® Program

R05 The GIPS Standard

Part 1


 

Introduction

In this reading we focus on:

  • Goals of the GIPS Executive Committee.
  • Key features of the GIPS standards and the fundamentals of compliance.
  • How historical performance record must be presented.
  • The nine major sections of the GIPS standard.

Note: most of the material presented here is taken from the curriculum.

Goals of the GIPS Executive Committee

The goals of the GIPS Executive Committee are presented below:

  • To establish investment industry best-practices for calculating and presenting investment performance that promote investor interests and instill investor confidence.
  • To obtain worldwide acceptance of a single standard for the calculation and presentation of investment performance based on the principles of fair presentation and full disclosure.
  • To promote the use of accurate and consistent performance data.
  • To encourage fair global competition among investment firms without creating barriers to entry; and
  • To foster the notion of industry “self-regulation” on a global basis.

Key Features of the GIPS Standards

The key features of GIPS are as follows:

  • The GIPS standards are the ethical standards for investment performance presentation to ensure fair representation and full disclosure of investment performance. In order to claim compliance, firms must adhere to the requirements included in the GIPS standards.
  • Meeting the objectives of fair representation and full disclosure is likely to require more than simply adhering to the minimum requirements of the GIPS standards. Firms should also adhere to the recommendations to achieve best practice in the calculation and presentation of performance.
  • The GIPS standards require firms to include all actual, discretionary, fee-paying portfolios in at least one composite defined by investment mandate, objective, or strategy in order to prevent firms from cherry-picking their best performance. This means firms must create composites and each actual, fee-paying, discretionary portfolio must be in at least one composite. If a portfolio is not included in any composite, then the returns associated with it will not be included.
  • The GIPS standards rely on the integrity of input data. The accuracy of input data is critical to the accuracy of performance presentation. The underlying valuations of portfolio holdings drive the portfolio’s performance. It is essential that these and other inputs are accurate. The GIPS standards require firms to adhere to certain calculation methodologies and to make specific disclosures along with the firm’s performance.
  • Firms must comply with all requirements of the GIPS standards.

Historical Performance Record

  • A firm is required to initially present, at a minimum, five years of annual investment performance that are compliant with the GIPS standards. If the firm or the composite has been in existence for less than five years, the firm must present performance since the firm’s inception or the composite’s inception date.
  • Later the firm must present an additional year of performance each year, building up to a minimum of 10 years of GIPS-compliant performance.
  • Firms may link non-GIPS compliant performance to their GIPS-compliant performance provided that only GIPS-compliant performance is presented for periods after 1 January, 2000 and the firm discloses the periods of non-compliance.
  • Firms that manage private-equity, real estate, and/or wrap fee/separately managed account (SMA) portfolios must also comply with sections 6, 7, and 8 respectively, of the provisions of the GIPS standards that became effective as of 1 January, 2006.

Consider Firm A which was established in 2013 and decides to become GIPS compliant in 2014. Initially, it must present performance information for 2013 and 2014. Later, it must keep adding performance data every year until it builds up to a minimum of 10 years.

Consider Firm B which was established in 2008 and decides to become GIPS compliant in 2014. Initially, it must present performance information for five years from the period ending in 2010 to the period ending in 2014. Later, it must also add an additional year until it has 10 years of GIPS-compliant performance.

Compliance

The definition of the firm is the foundation for firm-wide compliance and creates defined boundaries whereby total firm assets can be determined.

  • Firms must take all steps necessary to ensure that they have satisfied all the requirements of the GIPS standards before claiming compliance.
  • Firms are strongly encouraged to perform periodic internal compliance checks.
  • Firms may choose to have an independent third-party verification that tests the construction of the firm’s composites as well as the firm’s policies and procedures as they relate to compliance with the GIPS standards. Verification is recommended, but it is voluntary and must be done by a third-party verifier.
  • In addition to verification, firms may also choose to have specifically focused composite testing (performance examination) performed by an independent third-party verifier to provide additional assurance regarding a particular composite.
  • The effective date for the 2010 edition of the GIPS standards is 1 January, 2011. Compliant presentations that include a performance for periods that begin on or after 1 January, 2011 must be prepared in accordance with the 2010 edition of the GIPS standards.

Implementing a Global Standard

  • The presence of a local sponsoring organization for investment performance standards is essential for effective implementation and ongoing support of the GIPS standards within a country. The curriculum lists GIPS country sponsors for a few countries.
  • Country sponsor ensures that the country’s interests are taken into account as the GIPS standards are developed.
  • The GIPS executive committee strongly encourages countries without an investment performance standard to promote the GIPS standards as the local standard. If there is no local standard in a country, then it is ideal for the country to promote and adopt GIPS as it is a global standard, and when required translate them into the local language.
  • Compliance with applicable law and rules does not necessarily mean compliance with GIPS.
  • In cases in which laws and/or regulations conflict with the GIPS standards, firms are required to comply with the laws and regulations and make full disclosure of the conflict in the compliant presentation. Firms can still claim compliance with GIPS but they must disclose wherever there is a deviation that the law of the land is being followed.


Ethics The GIPS Standard Part 1