The provisions within the 2010 edition of the GIPS standards are divided into nine sections:
The provisions are categorized into requirements and recommendations. All the requirements must be implemented to claim compliance.
0.A.1: Firms must comply with all the requirements of the GIPS standards, including any updates, Guidance Statements, interpretations, Questions & Answers (Q&As), and clarifications published by CFA Institute and the GIPS Executive Committee, which are available on the GIPS standards website (www.gipsstandards.org) as well as in the GIPS Handbook.
0.A.2: Firms must comply with all applicable laws and regulations regarding the calculation and presentation of performance.
If there are no applicable laws and rules, then GIPS compliant firms must follow the GIPS standards. But, if a country has applicable laws and regulations regarding the calculation and presentation of performance, then the country laws must be followed and any differences with GIPS must be documented.
0.A.3: Firms must not present performance or performance-related information that is false or misleading.
0.A.4: The GIPS standards must be applied on a firm-wide basis.
0.A.5: Firms must document their policies and procedures used in establishing and maintaining compliance with the GIPS standards, including ensuring the existence and ownership of client assets, and must apply them consistently.
0.A.6: If the firm does not meet all the requirements of the GIPS standards, the firm must not represent or state that it is “in compliance with the Global Investment Performance Standards except for . . .” or make any other statements that may indicate partial compliance with the GIPS standards.
Firms are not allowed to claim partial compliance with the GIPS standards.
0.A.7: Statements referring to the calculation methodology as being “in accordance,” “in compliance,” or “consistent” with the Global Investment Performance Standards, or similar statements, are prohibited.
0.A.8: Statements referring to the performance of a single, existing client portfolio as being “calculated in accordance with the Global Investment Performance Standards” are prohibited, except when a GIPS-compliant firm reports the performance of an individual client’s portfolio to that client.
0.A.9: Firms must make every reasonable effort to provide a compliant presentation to all prospective clients. Firms must not choose to whom they present a compliant presentation. As long as a prospective client has received a compliant presentation within the previous 12 months, the firm has met this requirement.
0.A.10: Firms must provide a complete list of composite descriptions to any prospective client that makes such a request. Firms must include terminated composites on the firm’s list of composite descriptions for at least five years after the composite termination date.
A composite must be clearly described as to what mandate or strategy it is following: For example, small-cap equity value, Japan-equity, fixed-income etc. If a composite was terminated, then its performance must be presented for at least five years after termination to overcome survivorship bias.
0.A.11: Firms must provide a compliant presentation for any composite listed on the firm’s list of composite descriptions to any prospective client that makes such a request.
A compliant presentation is one that complies with all the GIPS provisions.
0.A.12: Firms must be defined as an investment firm, subsidiary, or division held out to clients or prospective clients as a distinct business entity.
Scenario: Assume there is a firm called UBL and it has a subsidiary called UBL-Asset Management (UBL-AM). If investors approach UBL-AM to trade and invest in securities/funds, then UBM-AM is the firm here, and must comply with the GIPS standards.
0.A.13: For periods beginning on or after 1 January 2011, total firm assets must be the aggregate fair value of all discretionary and non-discretionary assets managed by the firm. This includes both fee-paying and non-fee-paying portfolios.
Do not confuse this with a composite. A composite must include only actual, fee-paying discretionary portfolios. But, when a firm reports its total assets, it must include the fair value of all discretionary and non-discretionary assets and all fee-paying and non-fee paying portfolios.
0.A.14: Total firm assets must include assets assigned to a sub-advisor provided the firm has discretion over the selection of the sub-advisor.
0.A.15: Changes in a firm’s organization must not lead to alteration of historical composite performance.
0.A.16: When the firm jointly markets with other firms, the firm claiming compliance with the GIPS standards must be sure that it is clearly defined and separate relative to other firms being marketed, and that it is clear which firm is claiming compliance.
Outlined above are requirements. The GIPS standards also include requirements. For example, assume an investment management company, HS, has different geographical offices, which operate under the same brand name but as individual investment management companies such as HS Malta plc, HS Spain, HS India Limited, HS Malaysia Limited. The firm definition should be broad enough to include all geographical offices under one umbrella. This is just a recommendation, not a requirement.
At Level I you are required to know the details of Provision 0 (Fundamentals of Compliance). For provisions 1 – 8 you just need to know the basic descriptions which are given below:
A sample GIPS-compliant presentation report is presented below. Some of the important aspects that you can take note of are:
Sample 1 Investment Firm Balanced Growth Composite (from the curriculum)
1 January 2002 through 31 December 2011
|Year||Composite Gross Return (%)||Composite Net Return (%)||Custom Benchmark Return (%)||Composite 3-Yr St Dev (%)||Benchmark 3-Yr St Dev (%)||Number of Portfolios||Internal Dispersion (%)||Composite Assets ($ M)||Firm Assets ($ M)|
Sample 1 Investment Firm claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Sample 1 Investment Firm has been independently verified for the periods 1 January 2000 through 31 December 2010. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.