Understanding GIPS
- For investment firms NOT individuals
- Voluntary
- More conceptual than specific rules
GIPS Executive Committee Objectives
- Develop and implement GIPS
- Provides clarity and answers questions
- Coordinates countries
Benefits to Prospective Clients and Investment Managers
Prospective Clients
Confidence in performance data
cross-border comparable
Investment Managers
Competitive advantage
Required by some clients
Input Data Requirements and Recommendations
Requirements
- Use trade date accounting
- Use accrual accounting
- Fair value (not book or cost basis)
Recommendations (not required)
- Value portfolios on date of all ECF
- Valuation done by third party
Original and Modified Dietz Calculation
Original Dietz (Priot to 1/1/2005)
(EV - BV - ECF) / BV + (0.5)(ECF)
Modified Dietz (2005 - 2010)
(EV - BV - ECF) / BV + (days/30)(ECF)
Composite Construction
Group of similar accounts by investment style
Weights are based on BV or BV + ECF (cannot use EV)
Portfolios to Include in GIPS
- All fee-paying discretionary accounts MUST be in at lease one composite
- Nondiscretionary must to excluded
- Can include non-fee-paying portfolios if disclosed
- Portfolios below a defined size should be removed
- Remove portfolios temporarily with large ECF
Required Disclosures
MUST appear in report
- Benchmark description
- GIPS compliance statement (verified or not)
- Composite description
- Composite date
- Composite list
- Currency
- Dispersion - Internal
- Dispersion - External
- Firm description and total assets
- Fee schedule
- Policies for valuing, calculating, and presenting performance
Require Performance
- # of portfolios by year
- Composite assets by year
- Any type of dispersion
- 3 year std for composite and benchmark
- % of non-fee-paying or bundled
Disclosures Only when Relevant
- Must report major events (manager leaving)
Special Provisions
Real Estate
- Income + Capital must = total return each quarter
- Quarters to NOT need to equal annual
- Can use chain-linked TWR (may cause annual return to be slightly higher)
Carve Outs
Cannot use Carve-out segments excluding cash
Beginning January 1, 2010, carve-out returns can only be used if:
- Has its own cash balance
- Completely separated
Private equity notes
- Private equity
- must have vintage year (first capital call)
- report GOF and NOF
- Net out carried interest, management fees, transactions costs
- Required ratios; compared to paid-in capital
Other notes
- Fewer than 6 portfolio: no dispersion required
- Only trading fees should be deducted for GOF (NOT custodial fees)
Hierachy of Pricing
- Quoted prices from an active market for the same or similar security.
- Quoted prices from an inactive market for the same or similar security.
- Observable market-based inputs other than quoted prices.
- Subjective, unobservable inputs.
