What are the key benefits for institutional investment management firms and their clients to comply with the GIPS standards?
- standardization of performance presentation
- prospective and existing clients will have a greater degree of confidence in the firm’s performance numbers
What are the 6 key aspects of the GIPs standards?
- Information about a firm
- Composite returns
- Data used to determine performance calculations
- Calculation methodologies
- Presentation and reporting
- Information about a firm’s responsibilities
What are some key pieces of information about a firm (as per GIPs)?
- a firm must specifically define the legal entity that encompasses it
- a firm’s total assets must be the aggregate of the fair value of all of its discretionary and non-discretionary assets within the defined firm
- must include sub advisor performance
- changes in the firm’s organization may not be used as a reason to alter historical composite results
What are two key details about composites?
- firms must include all actual, fee paying discretionary portfolios in at least one composite
- discontinued portfolios must be included
What are two key details about data used to determine performance calculations
- a firm must maintain and capture all of the data it deems to support and perform the required performance calculations and presentations and valuations must be based on fair value
- valuations must be performed monthly (after 2001)
- firms must value portfolios on the date of all large external cash flows (after 2010)
What are 3 key details about the required calculation methodologies under GIPs?
- total return must be used
- time weighted returns must be used
- periodic returns must be geometrically linked
GIPS standards require that each composite show at least ____ years of performance data.
5
Each composite’s performance record must show ___ returns. Each composite must disclose the _____________ and the ____________.
- annual
- number of underlying portfolios
- amount of assets
Describe a portfolio management report
- a document of record that an institutional client refers to for information on a firm’s holdings and performance
- focuses on a fund’s particulars
Describe the importance of market prices
- for risk management and performance measurement, market prices are more useful than historical costs
- in some cases the actual bid price may be a better proxy than the price of the last transaction
What are two key pieces of the internal records of a trade?
- clearing is the process of confirming and matching security trade details
- settlement is the moment of irrevocable exchange of cash and securities
What is the role of a custodian?
- a custodian is the firm’s official record keeper
- they record information about a portfolio on the settlement dat which is usually no more than two business days after the trade
What three parties does an institutional trade involve?
- an investment manager
- a dealer (executes trade)
- custodian (holds the institutional investors assets)
What are trade-matching elements?
- certain details to facilitate the settlement of the trade
- there are 26 elements that need to be confirmed for an institutional equity trade
- these elements can be grouped into the categories 1. security identification and order and trade information
Once the trade-matching is complete and the custodian has confirmed the trade, what steps are taken?
- Manager advises dealer and custodian how the traded securities are to be allocated among the manager’s underlying institutional client accounts
- The dealer reports and confirms the trade details to the manager and clearing agency (similar to trade matching details)
- the custodian of the institutional investor’s assets verifies the trade details and settlement instructions against the available securities or funds help for the investor. Once both sides agree, the manager instructs the custodians to release the funds or securities or both to the dealer through the clearing agency’s facilities
What are three aspects of the clearing and settlement process that sometimes cause errors and delays?
- Inadequate technology
- Timing of activities
- Data integrity and accounting issues
What are 6 of the most commonly encountered discrepancies?
- make sure there is sufficient cash available
- ex-dividend
- receiving dividend on time
- stock split
- mergers and acquisitions
- difference in fx rate
What are three reasons why performance attribution is an important component of the investment process?
- It ensures a portfolio’s investment objectives are being satisfied
- It is an important statistic used to monitor a PMs performance
- It is used to calculate the value added of the investment strategy
What is the main objective of the attribution process?
-separate the skills component from the luck component
The two components of an overall portfolio’s returns are:
- Asset allocation
2, Security selection
Portfolio performance attribution involves four steps:
- Calculate the managed portfolio’s returns
- Calculate the benchmark portfolio’s returns
- Calculate the managed portfolio’s excess return
- Explain the difference in returns based on asset/component allocation and security selection
The mathematics of a bond portfolio’s attribution is not as straightforward as an equity portfolio. It is way more complex. What are some of the attribution factors that are considered?
- Income effect
- Pay down effect
- Amortization/roll effect
- Duration effect
- Convexity effect
- Sector/quality effect
- Security selection
- Residual factor
Describe returns-based style analysis?
- developed by William Sharpe
- suggested that a fund’s investment style may be determined by comparing the fund’s returns to the returns of a number of selected passive style indexes
What were Sharpe’s 12 investment styles
- Treasury bills
- Intermediate bonds
- Long term bods
- Corporate bonds
- Mortgage-related securities
- Large-cap value stocks
- Large-cap growth stocks
- Mid-cap stocks
- Small-cap stocks
- Non-US bonds
- Euro stocks
- Japanese stocks
