Overview of the Global Investment Performance Standards

The Global Investment Performance Standards for Firms meet the need for globally accepted standards for investment management firms in calculating and presenting their results to clients and prospective clients. The GIPS standards will continue to evolve to address additional aspects of performance presentation. Firms that claim compliance must meet all applicable requirements, including not only the provisions of the GIPS standards but also any Guidance Statements, interpretations, and Questions & Answers published by CFA Institute and the GIPS standards governing bodies. Practitioners should register for the GIPS Newsletter to stay informed about existing and new requirements and recommended best practices. CFA Institute and other organizations offer publications and conduct conferences and workshops designed to help practitioners implement and maintain compliance with the GIPS standards. This reading has made the following points:

• Only investment management firms and asset owners that manage assets on a discretionary basis—and compete for business—may claim compliance with the GIPS Standards for Firms.
• The objectives of the GIPS standards are as follows: (1) Promote investor interests and instill investor confidence; (2) ensure accurate and consistent data; (3) obtain worldwide acceptance of a single standard for calculating and presenting performance; (4) promote fair, global competition among investment firms; and (5) promote industry self-regulation on a global basis.
• When the GIPS standards conflict with law and/or regulations regarding the calculation and presentation of performance, firms must comply with the law or regulations and disclose the conflict in the GIPS Report.
• Required fundamentals of compliance with the GIPS standards include properly defining the firm, providing GIPS Reports to all prospective clients/investors, adhering to applicable laws and regulations, and ensuring that information presented is not false or misleading.
• A “firm” is an investment firm, subsidiary, or division held out to the public as a distinct business entity.
• A composite is an aggregation of one or more portfolios managed according to a similar investment mandate, objective, or strategy. The composite return is the weighted average of the return of all portfolios in the composite.
• All discretionary, fee-paying, segregated accounts must be included in at least one composite. All discretionary, fee-paying pooled funds must be included in any composite for which they meet the composite definition. A portfolio is discretionary if the firm is able to implement the intended investment strategy.
• Firms must formulate, document, and adhere to composite- and pooled fund–specific policies for the treatment of external cash flows and to adhere to those policies consistently.
• The GIPS standards mandate the use of certain calculation methodologies to facilitate comparability of results among firms. Time-weighted returns are required for all portfolios except portfolios meeting certain criteria.
• Money-weighted returns may be presented instead of time-weighted returns if the firm has control over the external cash flows into the portfolios in the composite or the pooled fund and at least one of the following conditions 40 Overview of the Global Investment Performance Standards is met: the portfolios in the composite are (or the pooled fund is): 1) closed-end; 2) fixed life; 3) fixed commitment; or 4) have illiquid investments as a significant part of the investment strategy.
• Returns for periods of less than one year must not be annualized.
• Returns from cash and cash equivalents must be included in all total return calculations.
• Returns must be calculated after the deduction of transaction costs.
• Assets must be valued using a fair value methodology. If objective, observable, unadjusted quoted market prices for identical investments in active markets on the measurement date are available, they must be used. If they are not available, firms may use, in this order: (1) quoted prices for similar investments in markets that are active; (2) quoted prices for identical or similar investments in markets that are not active; (3) market-based inputs, other than quoted prices, that are observable for the investment; or (4) subjective, unobservable inputs.
• A firm must have a clear, written definition of discretion that is consistently applied.
• Firms may not link the theoretical performance of simulated or model portfolios with actual performance.
• GIPS Composite Reports that present TWRs must include the following key items:
  • at least five years of annual performance (unless the composite has been in existence for a shorter period), building to a minimum of 10 years of returns;
  • composite and benchmark annual returns for all years;
  • the number of portfolios (if six or more) in the composite at each period end; ● the amount of assets in the composite;
  • the amount of total firm assets at the end of each period;
  • a measure of internal dispersion of individual portfolio returns for each annual period and, where monthly returns are available; and
  • the three-year annualized ex post standard deviation of the composite and of the benchmark as of each annual period end.
• Performance from a past firm or affiliation may be linked to the performance of the new or acquiring firm if (1) substantially all the investment decision makers are employed by the new or acquiring firm, (2) the decision-making process remains substantially intact and independent within the new or acquiring firm, (3) the new or acquiring firm has records that document and support the reported performance, and (4) there is no break in the track record between the past firm or affiliation and the new or acquiring firm.
• Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis.
• Verifiers must determine if the firm satisfies the GIPS standards requirements with respect to recordkeeping, policies and procedures, the definition of the firm, the completeness of the list of composites and limited distribution pooled fund descriptions, and the calculation of total firm assets.
• A verification report may be issued only with respect to the whole firm.