1
Q
What are the **objectives **of GIPS?
A
- establish global, industry-wide best practices for **calculation **and presentation
- facilitate accurate and unambigupus presentation of investment performance
- facilitate comparison of historical performance
- encourage full disclosure and fair global competition without barriers to entry
- encourage self-regulation
2
Q
What are some important **characteristics **of GIPS?
(1)
A
- voluntary, minimum set of standards
- must meet requirements on a firm-wide basis
- only managers can claim compliance, not individuals
- all discretionary, fee-paying portfolios must be included
- must present at least 5 years of GIPS-compliant history, or since inceptio
- can link to noncompliant performance but must present only compliant data for Jan 1, 2000 or later
*
3
Q
What are some important characteristics of GIPS?
(2)
A
- accuracy of input data is critical
- must use prescribed calculation and presentation methods
- if something not specifically addressed in GIPS, firms encouraged to fully explain, disclose, and present all relevant supplemental info
- firms encouraged to develop monitoring and controls for maintaining compliance
- firms must document policies use to ensure existence and ownership of client assets
4
Q
What are the benefits to clients of GIPS?
A
- ability to compare performance of firms operating in diff. countries
- GIPS ensures that performance data are complete and fairly presented
5
Q
What are the benefits to managers of GIPS?
A
- provide ability to compete fairly in foreign markets
- GIPCS can be used to identify weaknesses in internal management controls during GIPS implementation
6
Q
What considerations go into definition of a firm?
A
- firm: “an investment firm, subsidiary, or division held out to clients or potential clients as a distinct business entity”
- distinct business entity: department, unit, or office that is organizationally or functionally separated from others and retains discretion over the assets it manages and autonomy over the decision-making process
- total firm assets are total fair value of all assets firm manages, including non-fee-paying and non-discretionary accounts.
- assets delegated to subadvisors are included in total firm assets **if the advisor selected the subadvisor. **Otherwise, not included
7
Q
How is discretionary defined?
A
- sufficiently free of client-mandated constraints such that the manager is able to persue its stated strategy, objectives, and mandate
- all actual, fee-paying discretionary portfolios must be included in at least one composite
8
Q
(Req) Input data - Data Retention
A
- all input data necessary to support claim of compliance must be stored and maintained
9
Q
(Req) Input Data - Validation Methodology
A
- any period on or after Jan 1, 2011 must use fair value
- for liquid securities, observable prices for identical securities must be used
- for illiquid, firms should used recognized and justifiable methods for estimating fair value
- cost or book value is not allowed
10
Q
(Req) Input Data - Valuation Frequency
A
- Current (since Jan 1 2010): valued at least monthly **and **on the date of all large external cash flows
- “large” is not defined by GIPS. firms define large either on a value or percentage basis
- guidance: large is one that has potential to distort valuations
- Since Jan 1, 2001: at least monthly
- Before Jan 1, 2001: at least quarterly
11
Q
(Req) Input Data - Valuation Date
A
- Current (since Jan 1, 2010): valuation must happen as of calendar month-end *or *last business day of month
- Prior: more flexibility was given
12
Q
(Req) Input Data - Accounting Type
A
- Current (since Jan 1, 2005): must use trade-date accounting
- Prior: settlement-date accounting was allowed
13
Q
(Req) Input Data - Securities that accrue interest income
A
- accrual accounting must be used for fixed income and all other assets that accrue interest
14
Q
(Req) Input Data - Valuation Date for Composites
A
- Current (since Jan 1, 2006): composites must have **consistent **beginning and ending valuation dates
- unless composite is reported on non-calendar fiscal year, beginning and ending dates must be calendar year end
- valuation dates must be the same each year
15
Q
(Req) Calculation Methodology - Total Returns
A
- total returns (including capital gains) must be used
- theory: assets could be sold to realize their increased value
16
Q
(Req) Calculation Methodlogy - Time Weighted Returns
A
- time-weighted returns that adjust for external cash flows must be used
- sub-period returns must be geometrically linked
- TWRR remves the effects of cash flows and best reflects the firm’s ability to manage portfolio assets according to stated strategy
17
Q
Can a firm use *different *calculation methodologies for different portfolios in the *same *composite?
A
- Yes, as long as the methodologies are consistently applied (no changing methodology month-to-month)
18
Q
What are the TWRR methodologies that do adjust for cash flows, but are not permitted?
A
- Modified Dietz
- **not permitted **(after Jan 1, 2010)
- provides** estimate **
- assumes: constant rate of return on portfolio in the period
- assumption means that portfolio value does not need to be determined at each cash flow
- cash flows weighted by number of days they were present or absent
- Modified Internal Rate of Return (MIRR)
- **not permitted **(after Jan 1, 2010)
- provides *estimate *
- Original Dietz
- **not permitted **(permitted until Jan 1, 2005)
- provides **estimate **
- assumes: all cash flows occur at midpoint of the period
- has effect of turning IRR (which is money-weighted) into time-weighted calculation
19
Q
What is a TWRR methodology that adjusts for cash flows and is permitted?
A
- TWRR using revaluation at the time of external cash flows
- assumes: cash flow is not available for investment until the beginning of the next day
- required since Jan 1, 2010
- results in most accurate return calculation, but requires precise valuation of the portfolio
20
Q
(Req) Calculation Methodology - Cash and Equivalents
A
- returns from cash and cash equivalents must be included in total return calculations as long as the PM had control over the amount of the portfolio that is allocated to cash
- this requirement even if the manager did not actually control the *investment *of the cash
21
Q
(Req) Calculation Methodology - Fees and Expenses - Handling of Trading Expenses
A
- all returns must be calculated after the deduction of actual trading expenses. estimating trading expenses is not allowed
- direct trading expenses: brokerage fees, regulatory fees, duty or stamp tax associated with transaction
- indirect trading expenses: bid-ask spread
- custody fees **not **considered a trading expense
22
Q
(Req) Calculation Methodology - Fees and Expenses - If direct trading expenses cannot be identified and segregated
A
- for gross-of-fee returns, returns must be reduced by entire bundled fee or the portion of the bundled fee that includes direct trading expenses
- for net-of-fee returns, returns must be reduced by entire bundled fee or the portion of the bundled fee that includes direct trading expenses and the investment management fee.
23
Q
What is a bundled fee?
A
- a bundled fee is one that includes multiple fees including:
- management
- transaction
- custody
- other administrative
24
Q
(Req) Composites - Weighting Methodology
A
- composite returns must be calculated by ass-weighting the individual portfolios using *beginning of period *values **or **a method that reflects both beginning of period values and external cash flows.
- 2 allowed methods:
- beginning of period market value plus weighted cash flows
- aggregating portfolio assets and cash flows to calculate performance of single master portfolio
25
(Req) Composites - Return Calculation Frequency
* Current (since Jan 1, 2010): composite returns must be calculated by asset-weighting individual portfolio returns at least monthly
* Previously (since Jan 1, 2006): asset-weighted at least quarterly
26
(Req) Discretionary Portfolios - What is included?
* all *actual*, *fee-paying, discretionary* portfolios **must** be included in **at least one **composite.
* *non-fee-paying* portfolios **may **be included in a composite (must disclose what percentage of firm assets it is)
* *non-discretionary* portfolios **must not **be included in a composite
27
(Req) Constructing Composites - Definitions
* composites must be defined according to similar investment objectives/strategies
* must include all portfolios that meet the composite definition
* full composite definition must be made avail upon request
* definitions like "equity" or "fixed income" may be too broad
28
(Req) Constructing Composites - Adding and Terminating
* composites mst include new portfolios on a "timely" and "consistent" basis (on a composite-by-composite basis)
* ideallly, portfolio should be included at the start of the next full performance period
* terminated portfolios must be included in the historical returns of the composite up to the last full measurement period
* portfolios cannot be switched to a diff composite **unless **a **documented** change in client guidelines or redefintion of the composite make it appropriate
* if a firm has a minimum asset level to determine inclusion, portfolios below that level **must not **be included in the composite
* if large temporary cash flow makes it hard to achieve the desired style:
* best: put assets in a separate account until they can be invested appropriately
* allowed: put the funds into the portfolio but exclude it for a while. cannot remove history
29
(Req) Carve-outs - Handling
* carve-outs **must not** be included in a composite unless the carve-out is actually managed separately with its own cash balance
30
(Req) Disclosure Requirements
| (1)
* there are two acceptable compliance statements: one for verified firms and another for non-verified firms
* must disclose definition of "firm"
* must disclose composite description
* must disclose benchmark description
* if presenting gross returns, disclose any other fees that we deducted in addition to direct trading exp
* if presending net returns
* disclose if any other fees are deduceted besides direct trading exp and mgmt fees
* if model or actual mgmt fees are used
* if returns are net of performance-based fees
31
(Req) Disclosure Requirements
| (2)
* must disclose currency used
* must disclose which internal dispersion measure used
* must disclose fee schedule
* must disclose composite creation date
* must disclose that list of composite descriptions avail upon req
* must disclose that valuation policies avail upon req
* must disclose presence, use, extent of leverage including frequency of use and enough info to be able to ID risks
32
(Req) Disclosure Requirements
| (3)
* must disclose all significant events that would help client interpret presentation
* must disclose any periods before Jan 1 2000 that are not compliant
* if firm redefined, must disclose date, description, reason
* if composite redefined, must disclose date, description, reason
* if composite name changes, must disclose
33
(Req) Disclosure Requirements
| (4)
* must disclose minimum asset level for portfolio inclusion in composite
* must disclose relevant details on treatment of withholding tax on divs, interest, cap gains
* must disclose any known material difference in valuation sources, xrates between the port and composite or the composite and benchmark
* must disclose how local laws conflict with GIPS
* must disclose policy used to allocate cash to carve-outs
* must disclose use of and dates of use of subadvisors
* must use 3 year annualize ex-post std dev of composites. if 3 years not avail, disclose that
*
34
(Rec) Disclosure Requirements
* *should* disclose material changes to valuation policies
* *should* disclose material changes to calculation policies or methodologies
* *should* disclose material diffs between benchmark an composite
* *should* disclose key asumptions used for valuation
* *should* disclose all firms in a parent company
* *should* disclose use of subjective unobservable inputs
* *should* disclose if the composite contains any prop money
35
(Req) Composites - Must-include items
| (1)
* at least 5 years annual perf
* annual retuns for all years clearly marked as gross or net of fees
* if initial period of composite is less than 1 year, must present returns from inception through initial year end (for composites that started after Jan 1 2011)
* returns from last annual period through termination date (for composites that ended after Jan 1 2011)
* annual returns for benchmark
* number of portfolo in composite at YE. dont have to do this if composite has 5 or fewer portfolios
* amount of assets in the composite at end of each annyual period
* total firm assets or composite asets as a percentage of firm assets
* measure of dispersion of indvidual portfolio returns, unless composite has 5 or fewer portfolios
36
(Req) Composites - Must-include items
| (2)
* three-year annualized ex-post std dev of monthly returns for composite and benchmark
* an additional 3-year ex-post risk measure if managmeent feels std dev is innappropriate
37
(Req) Composites - Other things
* returns of portfolios and composites for periods less than 1 year should not be annualized
* if contains any non-fee-paying portfolios, firm must present percentage of composite represented by non-fee paying portfolios
* if bundled fee, must include percentage of composite assets that has bundled fee
38
(Req) Composities - Portability
* composite performance is generally not portable but if a firm is acquired and the following conditions are met, the performance can be linked to:
1. substantially all investment decision makers are employed by the new firm
2. the decision making process remains substantially intact
3. the new firm has records that document and support the reported performance
If a firm acquires another that is not in compliance, they have one year to bring them into compliance
39
Which Real Estate and Private Equity types of investments fall under the **general provisions of GIPS?**
* publically traded real-estate securities, including REITS
* MBS
* private debt instruments where the expected return is solely related to contractural interest rates without any participation in economic performance of underlying real estate
* open-ended PE funds (because subs and reds may be made after fund's inception)
* evergreen PE funds (because they do not have fixed levels of capital and set number of investors)
40
(Req) Real Estate - Valuation
* Current (since Jan 1 2011): real estate must be valued in accordance with the defintion of fair value and the GIPS valuation principles
* Current (since Jan 1 2012): real estate must have *external valuation* done at least once every 12 months or if client agrees otherwise, at least once every 3 years.
* Previously (before Jan 1 2012): external valuation every 3 years
* Disclose internal valuation method uses and the frequency of external valuation. if internal method different than external, disclose and give reason for difference
41
(Req) Real Estate - Returns
* real estate portfolio returns must be calculated at least quarterly after the deduction of tcosts during the period
* tcosts are: actual financial, investment banking, legal and advisory fees, fees for recapitalization, restructuring, buying, selling properties
* composite returns must be calculated at least quarterly by asset-weighing individual portfolio returns
* Since Jan 1, 2006 you **cannot link to non-compliant performance.**
* **income return** and **capital return** must be broken out and must sum to total return.
42
(Req) Real Estate - Disclosures
* must provide description of "discretion" which is when the firm has sole or sufficient discretion to make major decisions regardin gthe investments
* must disclose both internal and external valuation methods used and give reason if they are different
* for composites with more than 5 portfolios, high and low of the portfolio time-weighted ROR must be disclosed as the internal dispersion number
* must disclose the percentage of composite assets valued using external valuator at the end of each annual period
43
(Req) Closed-End Funds - Returns and Composites
* Since Inception IRR (SI-IRR) must be reported using *at least* quarterly rates of return. this is the IRR of cash flows since start of portfolio
* less than a year: geometrically link. more than a year: annualize
* composites must be defined by grouping accounts with similar objective, strategy and **vintage year**.
* Vintage year defined by:
* year of first drawdown or capital call (when investors first contributed funds)
* when investor-contributed capital is closed and legally enforceable
*
44
(Req) Closed-End Funds - Disclosures
* final liquidation data for liquidated composites
* frequency of cash flows used in SI-IRR calculation
* Periods of less than a year must present net-of-fee SI-IRR and reporting must continue until liquidation of the composite
45
(Req) Closed-End Funds - Presentation and Reporting
* must report benchmark SI-IRR
* may wish to present gross-of-fee SI-IRR for comparison. If so, both gross- and net- must be shown for all reporting periods
* must disclose the following at end of each reporting period:
* committed capital and since-inception PIC
* distributions
* TVPI
* DPI
* PIC multiple
* RVPI
46
(Req) Private Equity - Input Data
* must be valued at least annually at fair value
47
(Req) Private Equity - Calculation Methodology
* SI-IRR
* Current (since Jan 1 2011): must be calculated using daily cash flows
* Previous (before Jan 1 2011): can use daily or monthly cash flows
* net-of-fee returns must be calculated with consideration given to mgmt fees and carried interest
* all returns must be calculated after deducting trading expenses for the period
* for fund of funds, all returns must be net of partnership fees, fund fees, expenses, and carried interest
48
(Req) Private Equity - Composite Construction
* composite defintions must remain consisten throughout life of composite
* primary funds must be included in at least one composite defined by vintage year and investment strategy, mandate, or objective
* fund of funds must be included in at least one composite by vintage year and/or investment strategy, mandate, or objective
49
(Req) Private Equity - Disclosures
* vintage year and definition of vintage year for composite
* liquidation date for liquidated composites
* valuation methodology used for most recent period and any material changs in methodology or policies
* industry guidelines that have been followed
* benchmark used and return calculation methodology applied to benchmark
* frequency of cash flows if daily not used in SI-IRR calc for periods prior to Jan 1 2011
* if any other fees are deducted in addition to transaction expenses when presenting gross-of-fee returns
50
(Req) Private Equity - Presentation and Reporting
(1)
* Current (since Jan 1 2011): must present both net-of-fee and gross-of-fee annualized SI-IRR fo the composite for each year since inception
* Current (since Jan 1 2011): for **fund of fund** composites, firms must present SI-IRR of the underlying investments grouped by vintage year
* must present:
* since inception PIC
* cumulative committed capital
* since-inception distributions
* TVPI
* DPI
* PIC to committed capital
* RVPI
51
(Req) Private Equity - Presentation and Reporting
(2)
* if benchmark is shown, cumulative annualized SI-IRR for a benchmark that reflects the same strategy and vintage year must be presented for same periods the composite is presented. if no benchmark, must explain why
* for fund of fund composites, if benchmark is presented, it must be same vintage year and investment objective as underlying investments
* fund of fund composites must preend percentage of composite assets invested in **direct investments**
* primary fund composites must present the percentage of composite assets invested in non-direct investments as of the end of each annual period
* can present non-compliant performance only before Jan 1 2006
52
Wrap Fee/Separately Managed Accounts - Definition
* This situation occurs when a manager K serves as a subadvisor for another manager B, and manager B charges the ultimate client a "wrap fee" that includes fees to be paid to both K and B. The key is the K must have discretion to manage assets. If K does, then the special WFSMA stuff applies
53
Wrap Fee/Separately Managed Accounts - Particularly important normal provisions
1. performance results of end-user client my be computed, documented, and verified. K can rely on B for this, or do it himself
2. returns must be calculated after actual trading expenses. if they cannot be separated, the entire bundled fee must be deducted from the return
3. all fees included in the bundled fee must be disclosed
4. composite results must disclose the percentage of composite assets made up of portfolios with bundled fees
54
Wrap Fee/Separately Managed Accounts - Additional Provisions
* include performance of actual WFSMAs in appropriate composites and use those composite results for presentations to prospective new WFSMA prospects
* if composite includes periods when non-WFSMAs are included, disclose details
* if manager K manages assets according to the same style for multiple sponsors, the presentation to propsective clients must include the results of all WFSMAs that follow that style
55
Valuation Principles - Hierarchy
1. market value for actively traded security
2. quoted prices for less actively traded identical or very similar investments
3. using market-based inputs to estimate price (P/E or div yield for comparable actively traded security to infer a price estimate, or using YTM for similar actively traded bond)
4. price estimates based on not directly observable inputs (ex: DCF price estimate based on projected cash flows and assumed discount rate)
56
Valuation Principles - Additional Guidance for Real Estate
* real estate must be valued externally by outside sources using accepted industry and governmental standards
* external valuators fee must not be based on resulting value
* appraisal standards allow reporting values in ranges, GIPS *recommends* reporting a single value for return purposes
* a firm should rotate external valuators every 3-5 years
57
Valuation Principles - Additional Guidance for Private Equity
* valuation methodology utilized must be "the most appropriate for a particular investment based on the nature, facts, and circumstances of the investment"
* when valuing private enterprises, consider:
* reliable appraisal data
* comparable enterprise or transaction data
* enterprise's stage of development
* additional characteristics unique to the enterprise
58
59
GIPS Advertising Guidelines - Must Includes
* description of firm
* how an interested party can obtain full presentation and/or list of all firm composites
* "XYZ claims compliance with the Global Investment Performance Standards"
* description of the composite being advertised
* one of the following sets of returns
* 1,3, and 5 year annualized composite returns
* period-to-date composite performance results in addition to above
* period-to-date composite returns in additon to five years of anual composite returns
* whether returns gross or net
* benchmark total return for same period
* currency used
* describe extent and use of leverage, derivatives, and short selling sufficient to ID risks
* periods of non-compliance
60
Verification Report - Must includes
* that the investment firm has complied with all the composite construction requirements of GIPS on a firm-wide basis
* that the firm's processes and procedures are designed to calculate and present performance results in compliance with GIPS
61
GIPS Verification - General
* single verification report issued to entire firm. cannot be done for a single composite
* voluntary but strongly encouraged
* cannot be partial. all or nothing
* if canoot be verified, verifier must issue a statement to the firm clarifying why verfication was not possible
62
After-Tax Returns
* must be presented as supplemental information
* 2 methods
* pre-liquidation method
* mark-to-liquidation method
63
After-Tax Returns - Pre-Liquidation Method
* calculates after-tax returns based on income gained and G/L actually recognized ober the period through asset sales.
* ignores unrealized G/L, which generally underestimates tax liability
64
After-Tax Returns - Mark-to-Liquidation Method
* assumes all gains, whether recognized or not, are taxed each period
* ignores the value of tax deferrals, generally overstates tax liability and understanding after-tax returns
CFA Level 3 - GIPS
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