Global Investment Performance Standards (GIPS)

Misleading reporting procedures

Misleading reporting procedures are often used:

Representative accounts--showing a top-performing portfolio as representative of firm results

Survivorship bias--excluding "weak performance" accounts that have been terminated

Varying time periods--showing performance for selected time periods with outstanding returns

-set of ethical principles based on a standardized, industry-wide approach

-firms can voluntarily follow GIPS

-allow clients to more easily compare investment performance among investment firms and have more confidence in reported performance

grouping of individual discretionary portfolios representing a similar investment strategy, objective, or mandate

EX: investment grade domestic bonds

-gives investors an idea of a firms performance according to different investment strategies

*should include all portfolios (current and terminated) that the firm has managed in accordance with this strategy

*firms should choose composites that portfolios should be included in before portfolio performance is known

Requirements: (performed by third party)

1. firm has complied with all GIPS requirements for composite construction on a firm-wide basis

2.firm's processes and procedures are established to present performance in accordance with teh calculation methodology required by GIPS, the data requirements of GIPS, and the format required by GIPS

-firms encouraged to pursue independent verification--applies to entire firm's performance measurement practices

-verified firms should include the following disclosure language:

"firm name has been verified for period through period. A copy of verification report is available upon request"

-obtain global acceptance of calculation and presentation of standards in a fair and comparable format

-ensure consistent and accurate performance data in areas of reporting, records, marketing, and presentations

-promote fair competition among investment management firms in all markets

-promote global "self-regulation"

-to claim compliance, participant must define its "firm"

-GIPS are ethical standards that ensure fair representation of results and full disclosure

-include all fee-paying, discretionary portfolios in composites for a minimum of five years or since firm or composite inception. after presenting five years, the firm must add annual performance each year going forward up to a minimum of 10 years

-firms required to use certain calculation and presentation standards and make specific disclosures

-input data must be accurate

-GIPS contain both required and recommended provisions--firms are encouraged to adopt the recommended provisions

-firms encouraged to present all pertinent additional and supplemental information

-no partial compliance--only full compliance can be claimed

-follow the local laws for cases in which a local or country-specific law or regulation conflicts with GIPS, but disclose the conflict

-certain recommendations may become requirements in the future

-supplemental private equity and real estate provisions contained in GIPS are to be applied to those asset classes

Fundamental of Compliance (GIPS)

definition of firm--requirements

-apply GIPS on firm-wide basis

-firm must be defined as a distinct business unit

-total firm assets include total market value of discretionary and non-discretionary assets, including fee-paying and non--fee--paying accounts

-include asset performance of sub-advisors, as long as the firm has discretion over sub-advisor selection

-if a firm changes its organization, historical composite results cannot be changed

Fundamental of Compliance (GIPS)

definition of the firm--recommendations

-include the broadest definition of the firm, including all geographical offices marketed under the same brand name

Fundamental of Compliance (GIPS)

Document Policies and Procedures--requirements

-document, in writing, policies and procedures the firm uses to comply with GIPS

Fundamental of Compliance (GIPS)

Claim of compliance--requirements

-once GIPS requirements have been met, the following compliance statement must be used

"name of firm has prepared and presented this report in compliance with the Global Investment Standards (GIPS"

-no such thing as partial compliance

-there are to be no statements referring to calculation methodologies used in a composite presentation being "in accordance with GIPS" or the like

-there should be no such statements referring to the performance of an individual, existing client as being "calculated in accordance with GIPS" or the like, unless a compliant firm is reporting results directly to the client

Fundamental of Compliance (GIPS)

Firm fundamental responsibilities--requirements

-firms must provide a compliance statment to all prospects (recieved a presentation within the previous 12 months)

-provide a composite list and composite description to all prospects that make a request. List discontinued composites for at least 5 years

-provide, to clients requesting it, a compliant presentation and a composite description for any composite included on the firm's list

-when jointly marketing with other firms, if one of the firms claims GIPS compliance, be sure it is clearly defined as separate from noncompliant firms

-firms are encouraged to comply wiht recommendations and must comply with all requirements. Be aware of updates, guidance statements, and the like

1. Fundamentals of compliance

2. input data

3. Calculation methodology

4. Composite Construction

5. Disclosures

6. Presentation and Reporting

7. Real Estate

8. Private Equity