A Lot!: Fundamentals of Performance Measurement +

5/21/2020
Fundamentals of Performance What we’ll cover:

Measurement +
Module #5: The GIPS® Standards
•A lot!
David D. Spaulding, DPS, CIPM
Copyright © The Spaulding Group, Inc. 2020 1 Copyright © The Spaulding Group, Inc. 2020 2
What we’ll cover: What we’ll cover:

• What the Standards are • Fair valuation
• Their objectives • The calculations
• A bit of history: why do we have them • The contents of GIPS reports
• How they’re organized • Supplemental information
• GIPS fundamentals, including firm definition, • Advertising guidelines
composites, and discretion • Policies & Procedures
• Verification
• Fair valuation
• An approach to compliance
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Firms Asset Owners Over time, we’ve seen many changes to

the rules …
• Naming changes
• Wording changes
• Procedural changes
• Calculation changes
• Valuation changes
The Standards are definitely quite dynamic!
While I will reference some of the 2020 changes So, what are the GIPS standards?

• This isn’t a review of the changes, nor will we cover • They’re voluntary standards governing the calculation and
all of them presentation of investment performance based on the
• Rather, the class is intended to cover a large portion ethical principles of fair representation and full disclosure
of the Standards, based upon what is now required • The mission of the GIPS standards is to promote ethics and
under the 2020 rules integrity, and instill trust
• We’ve done webinars on the changes, so if you want
to see them, let us know.
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What are their objectives?

• Ensure accurate and consistent data
• Obtain worldwide acceptance of a single standard for
calculating and presenting performance
• Promote fair, global competition among investment firms
• Promote industry self‐regulation on a global basis
• Promote investor interests and instill investor confidence
How are the Standards
organized?
In all previous versions of the Standards, The 2020 edition is broken into 3 chapters
• We’ve had a single book, comprising the entirety of the
provisions
• With the 2020 edition, it’s a bit different …
Available in hard copy, as well as soft:

Firms: https: //www.cfainstitute.org/en/ethics/codes/gips-standards/firms
Asset Owners: https://www.cfainstitute.org/en/ethics/codes/gips-standards/asset-owners
Verifiers: https://www.cfainstitute.org/en/ethics/codes/gips-standards/verifiers
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Other “structural” changes w/2020 2020 GIPS Standards for Firms sections
• There are no longer separate asset‐class sections for real 1. Fundamentals of Compliance 7. Pooled Fund Money‐Weighted
estate, private equity, or wrap fee portfolios 2. Input Data and Calculation Return Report
Methodology 8. GIPS Advertising Guidelines
• Each section includes any asset‐class or asset‐type
3. Composite and Pooled Fund Glossary
provisions Maintenance Appendices:
• E.g., for overlays, carve‐outs, wrap‐fee, private market 4. Composite Time‐Weighted A: Sample GIPS Composite Reports
• Dates are now included in footnotes Return Report
B: Sample GIPS Pooled Fund Reports
• Section numbers have gaps, to allow for easy insertion of 5. Composite Money‐Weighted
Return Report C: Sample GIPS Advertisements
new sections (w/o having to renumber everything) 6. Pooled Fund Time‐Weighted D: Sample Lists
Return Report
2020 GIPS Standards for Asset Owners sections 2020 GIPS Standards for Verifiers
21. Fundamentals of Compliance Glossary Verification
22. Input Data and Calculation Appendices:
Methodology
Performance Examination
A: Sample Total Fund GIPS Asset
23. Total Fund and Composite Owner Reports Glossary
Maintenance B: Sample Composite GIPS Asset Appendix A: Sample Independent Verifier’s Verification Report
24. Total Fund and Composite Time‐ Owner Reports
Weighted Return Report Appendix B: Sample Independent Verifier’s Performance
C: Sample GIPS Advertisement
25. Additional Composite Money‐ Examination Report
D: Sample List of Total Fund and
Weighted Return Report Composite Descriptions
26. GIPS Advertising Guidelines
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In the past … • No standards for how to

present performance
Why? •
•
A lot of confusion
Some deception
• No “level playing field”
• Risks of regulatory
involvement
?
Result: Some problems w/aggressive advertising An exposé!
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A word about discretion… So, something had to happen
Either
• The regulators would define the rules
• or, the industry would
Examples of approaches used to present
performance to prospects
And
Variability in how returns calculated
• Single account (“representative account”) • net‐of‐fee
• Static group of select accounts • gross‐of‐fee
• various approaches to discretion
• Dynamic group of select accounts • w/ or w/o accruals; w/ or w/o cash
• All accounts • time periods for returns (daily; monthly; quarterly;
• Model annually)
Inconsistency
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A brief history …
1986 – the Financial Analysts
Federation formed a “blue ribbon
committee” to address the issue of
presenting performance to prospects
1987 – draft standards published in
the FAJ
How do you select a manager?
A brief history … A brief history …

1990 – FAF merged with the 1995 – AIMR forms an international
Institute of Chartered Financial standards committee
Analysts to form AIMR (Assoc’n 1999 – First edition of GIPS
for Investment Management & published
Research) 2001 – AIMR-PPS becomes a
1993 – AIMR-PPS published “Country Version of GIPS”
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A brief history … We have a true, global standard

2006 – Second edition of GIPS
published (“Gold”)
2010 – Several new requirements went
into effect
2011 – Third edition published
2020 – Fourth edition goes into effect
GIPS Standards’ SPONSORS

Australia Financial Services Council (FSC) Italy Italian Investment Performance
(AS OF 30 June 2019)
Philippines CFA Society Philippines; Fund United Kingdom United Kingdom Investment
A brief history of
global standardization
Canada Canadian Investment Performance Committee (IIPC): Associazione Bancaria Italiana Managers Association of the Philippines (FMAP) Performance Committee (UKIPC): The
Council (CIPC) (ABI); Associazione Italiana degli Analisti e and Trust Officers Association of the Philippines Investment Association (TIA); The Association of
Consulenti Finanziari (AIAF); Assogestioni; (TOAP) British Insurers (ABI); Pensions and Lifetime
China CFA Society Beijing Società per lo sviluppo del Mercato dei Fondi Savings Association (PLSA); The Association of
Poland CFA Society Poland
Cyprus CFA Society Cyprus Pensione (Mefop); Associazione Italiana Revisori Consulting Actuaries (ACA); The Society of
• In a word: abomidable
Contabili (Assirevi); and CFA Society Italy Portugal Associação Portuguesa de Analista Pension Consultants (SPC); The Investment
Czech Republic CFA Society Czech Republic and Financeiros (APAF) Property Forum (IPF); The Alternative
Czech Capital Market Association (AKAT) Japan The Securities Analysts Association of
Russia CFA Association Russia Investment Management Association (AIMA);
• Consider
Japan (SAAJ)
Denmark CFA Society Denmark and The Danish and The Wealth Management Association
Finance Society Kazakhstan Association of Financial and Saudi Arabia CFA Society Saudi Arabia (WMA)
Investment Analysts (AFIA) Singapore Investment Management Association
Paper
France CFA Society France and Association United States United States Investment
•
Française de la Gestion Financière (AFG) Korea Korea Investment Performance of Singapore (IMAS)
Committee (KIPC) Performance Committee (USIPC) of CFA
Germany German Asset Management South Africa Association for Savings and Institute
Spelling
Liechtenstein Liechtenstein Bankers Association Investment South Africa (ASISA)
•
Standards Committee (GAMSC): Bundesverband
Investment und Asset, Manager e.V. (BVI); (LBA) Spain Asociación Española de Presentación de
Deutsche Vereinigung fur Finanzanalyse und Mexico CFA Society Mexico Resultados de Gestión
Assetment Management (DVFA); and CFA
Society Germany Micronesia Asia Pacific Association for Fiduciary
Studies (APAFS)
• Driving
Even electricity!
Ghana Ghana Securities Industry Association
(GSIA)
Greece CFA Society Greece
The Netherlands VBA‐Beleggingsprofessionals Sri Lanka CFA Society Sri Lanka
Sweden CFA Society Sweden and The Swedish
•
India CFA Society India New Zealand CFA Society New Zealand Society of Financial Analysts (Sveriges
Nigeria Nigeria Investment Performance Finansanalytikers Forening or SFF)
Committee: CFA Society Nigeria; Pensions Switzerland Swiss Funds & Asset Management
Indonesia CFA Society Indonesia and Indonesia Operators Association of Nigeria (PENOP); and Association (SFAMA)
Association of Mutual Fund Managers (Asosiasi Fund Managers Association of Nigeria (FMAN)
Pengelola Reksa Dana Indonesia, or APRDI) Thailand The Association of Provident Fund
Norway The Norwegian Society of Financial
Ireland Irish Association of Investment Analysts (NFF) (AOP)
Managers (IAIM)
Pakistan CFA Society Pakistan Ukraine The Ukrainian Association of
Peru Procapitales Investment Business (UAIB)
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Why comply?
Especially when The m ain reason
it’s firm s com ply:
• Costly,
• Time‐
consuming,
and
• Risky?
M ore & M ore,the M arketDem andsCom pliance
O ther reasons include: Questions?

• They’re a global standard that promote full
disclosure and ethical principles
• They are widely/globally accepted
• They’re considered “best practice”
• They provide rules that most organizations find
of value
• They result in the firm having great written P&P
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The Fundamentals of the GIPS Standards It all fits together …
Three of the most fundamental issues that a firm must • Firm definition is the foundation for firm‐wide compliance and
consider when becoming compliant are creates defined boundaries whereby total firm assets can be
• Firm definition determined.
• The firm’s definition of discretion, as it applies to the GIPS • The firm’s definition of [GIPS] discretion establishes criteria to judge
standards which portfolios should be in a composite to accurately reflect the
application of the firm’s investment strategy.
• And the firm’s composite definition principles and guidelines.
• Once the firm and discretion have been defined, composites can be
constructed based on the strategies implemented by the firm.
• Under the GIPS standards, they must comply with all applicable
laws and regulations.
The Fundamentals of the GIPS Standards
We’ll now delve a bit deeper into the fundamentals
• Firm definition
• Firm assets
• Composites
• Composite assets
• Discretion
Plus, a great deal more!
Begin with
“Firm Definition”
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Firm Definition: Adopting at the broadest level

the first step in moving to • Firms are encouraged to adopt the broadest, most meaningful
compliance definition of the firm. Examples:
• All offices operating under same brand name
• Other names resulting from mergers, acquisitions
• Financial services holding company, a global firm with multiple brands,
Ideally, define at the highest different legal entities, multiple offices, investment teams and
strategies
possible level. • A firm with one name, but multiple strategies and teams
A fair amount of flexibility. • All offices operating with same recognizable name with different global
Can require a lot of thought, offices (e.g., Mitsubishi UFJ Asset Management (UK) Ltd.)
especially for larger firms.
Firm definition flexibility … Possible criteria for the firm
• While firms are encouraged to adopt the broadest, this is not • A legal entity
required. • Has a distinct market or client type
• The GIPS “firm” does not have to be a legal entity • E.g., private wealth, institutional, retail
• If it does not comprise the entire FIRM (i.e., it’s a division or
• Uses a separate and distinct investment process
separate office of the FIRM), it must be held out distinctly from
the FIRM
• It can reference the larger FIRM, but the FIRM isn’t claiming
compliance, it’s the division or separate office
• It would be the firm that claims compliance, not the FIRM
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Exercise: How many different ways can the Additional considerations re. firm definition
following collection be defined? Note: they are all • When jointly marketing w/other firms, the firm claiming
independent divisions of XYZ Asset Management compliance must ensure it is clearly defined and separate,
relative to any other firms being marketed, and that it is clear
• XYZ Equity Management, New York City Office which firm claims compliance
• XYZ Fixed Income Management, NYC Office • If a parent company has multiple “defined firms,” each is
• XYZ Equity Management, London Office encouraged to disclose the other firms that claim compliance
• XYZ Fixed Income Management, Tokyo Office
• XYZ Equity Management, Tokyo Office
GIPS’ meaning of firm assets Firm assets must include:
• “All discretionary and non‐discretionary assets for which a • Assets for which the firm has either conditional or unconditional
firm has investment management responsibility.” authority to make investment decisions
• Must be the aggregate fair value of all discretionary and • Fee‐paying assets and non‐fee‐paying assets
[GIPS] non‐discretionary assets managed by the firm. This • Cash and cash equivalents (substitutes).
includes fee‐paying and non‐fee‐paying portfolios • Regarding “sub‐advisory” situations:
• Regarding “sub‐advisory” situations: • If the compliant firm has the ability to hire/fire sub‐advisors, then
• If the compliant firm has the ability to hire/fire sub‐advisors, then those assets fit within the firm
• If the compliant firm acts as a sub‐advisor, those assets fit within the
those assets fit within the firm
firm
• If the compliant firm acts as a sub‐advisor, those assets fit within
the firm
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Firm assets must exclude: Advisory‐only assets
• Advisory‐only assets • Advisory‐only assets are assets for which the firm
• Uncalled committed capital provides investment recommendations and for which two
• Overlay exposure. conditions are met. The firm:
• Has no control over implementation of investment decisions
• Does not have trading authority over the assets
• E.g., “UMA” (Unified Managed Account) programs
Advisory‐only assets Uncalled committed capital
• In the case of advisory‐only assets, the firm has no direct • Committed capital are pledges of capital to an investment vehicle by
investors (limited partners and the general partner) or the firm, and is
authority to manage or trade the account. typically drawn down over time.
• For this reason, the account must not be included in any • Uncalled committed capital is the amount of capital not yet drawn.
composite, and must not be included in total firm assets • For periods beginning on/ after 1 January 2020, uncalled committed
• Firms may report advisory‐only assets (“advisory assets”) capital must not be included in total firm assets.
• Uncalled committed capital is excluded from total firm assets because
and/or combined with (“firm + advisory assets”) in their • It is not actively under management by the firm and
GIPS reports • There may be cases in which the committed capital is never called and will
never be actively managed.
• Firms must still report separately “Firm assets”
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Overlays and overlay exposure Overlays and overlay exposure
• Overlay strategy are strategies where the management • For overlay strategies, overlay exposure is the
of a certain aspect of an investment strategy is carried economic value for which a firm has investment
out separately from the underlying portfolio. management responsibility.
• They are typically designed either to limit or maintain • Overlay exposure is the notional value of the overlay
a specified risk exposure that is present in the strategy being managed, the value of the underlying
underlying portfolio or to profit from a tactical view on portfolios being overlaid, or a specified target
the market by changing a portfolio’s specified risk exposure.
exposure.
Included in Total
Summary: helpful table
Type of Asset Reason
Overlays exposure Firm Assets?
(source: p. 5, Explanation of Provisions, Section 2)
Discretionary assets for which the firm has
Yes Firm controls investment decisions.
unconditional authority to implement its
• Firms must not include overlay exposure in total firm Non‐discretionary assets for which the firm
has conditional authority to implement the
Yes
Firm has limited control of investment
decisions.
assets. Non‐fee‐paying assets for which the firm has
conditional or unconditional authority to Yes
Firm has all or limited control of investment
• However, firms may wish to present information about implement the strategy
decisions.
Firm retains discretion over sub‐advisor
firm‐wide overlay exposure. Assets directed to a sub‐advisor by the firm Yes
selection and has investment management
Firm does not retain discretion over sub‐advisor
• For overlay strategy composites, the firm is not required Assets directed to a sub‐advisor by the client No selection and does not have investment
management responsibility.
to present total firm assets, and may, instead, choose to Assets within advisory‐only client
Firm has no control over implementation of
No investment decisions and no trading authority
present total firm overlay exposure as of each annual relationships
for the assets.
period end Uncalled committed capital No
Firm is not actively managing uncalled
committed
Overlay exposure No Firm is not managing the underlying assets.
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Definition – Composite: Importance of composites

• A composite is an aggregation of a number of • Allows for an “apples‐to‐apples” comparison
portfolios into a single group that represents a • Provides the prospect with the performance history
particular investment objective or strategy. relative to the strategy, style, approach, objective
• Creating meaningful composites is critical to the fair they’re interested in
presentation, consistency, and comparability of results
over time and among firms.
• Firms are free in defining the composites and setting
the principles to include a portfolio in a particular
composite.
Guiding Principles for Composites Guiding Principles for Composites
• Composites must be defined according to similar investment • Firms must apply the inclusion criteria consistently (e.g., no “cherry‐
objectives and/or strategies. Can’t mix different investment picking”), and must include all portfolios that satisfy the criteria.
strategies or objectives in the same composite. The results would • If there are many portfolios with unique investment characteristics, it
be meaningless. may be necessary to create numerous single‐portfolio composites.
• Composites should enable clients to compare the performance of • Portfolios can’t be moved into/out of composites except in the case of:
one firm to another. • documented, client‐driven changes to investment objectives or guidelines
• composite redefinition
• The firm should also consider the definition and construction of
• [new, with 2020] the client has granted the manager the authority to make
similar products found within the competitive universe. such changes.
• Composites must be representative of the firm’s products and be • Portfolios’ historical records must remain with the composite.
consistent with the firm’s marketing strategy.
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Composite Definition Criteria Suggested criteria for composite creation
• Asset classes (e.g., equity, fixed income)
• Before defining composites, the firm needs to establish
reasonable criteria to support the fundamental principle of fair • Investment style or strategy (e.g. growth)
representation. • Portfolio Risk characteristics (e.g. target tracking error)
• A variety of criteria must be analyzed to identify whether • Client type (e.g. institutional, retail)
portfolios are similar and should be grouped together into a
composite, or placed into multiple composites. • Portfolio size
• Some firms drive composite definition based off the strategies • Instruments used (e.g., funds, ETFs , individual
they offer, while others create new composites whenever a securities)
client makes a new request. • Base currency
Suggested Criteria (cont’d) Composite definitions/descriptions
• Compliant firms are required to have both composite
• Client characteristics (e.g., tax status, cash flow
definitions and composite descriptions
needs, risk tolerances)
• Composite Definition: Detailed criteria that determine the
• Investment guidelines (especially for balanced assignment of portfolios to composites. Criteria may include,
portfolios) but are not limited to, investment mandate, style or strategy,
• Extend of the use of derivatives, hedging and leverage asset class, the use of derivatives, leverage and/or hedging,
• Benchmark(s) of the portfolios targeted risk metrics, investment constraints or restrictions,
• Treatment of taxes and/or portfolio type (e.g., segregated account or pooled
fund; taxable versus tax exempt).
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Composite definitions/descriptions Composite definition criteria
• Composite Description: General information regarding the • Firms may choose to define their composites according
investment mandate, objective, or strategy of the composite. It to relevant criteria and must document the definition of
may be more abbreviated than the composite definition, but
each composite, including any criteria or constraints.
must include all key features of the composite and must include
enough information to allow a prospect to understand the key • It is constructive to consider a hierarchical structure of
characteristics of the composite’s investment mandate, criteria for composite definition that promotes primary
objective, or strategy, including: and secondary strategy characteristics.
• The material risks of the composite’s strategy.
• How leverage, derivatives, and short positions may be used, if they
are a material part of the strategy.
• If illiquid investments are a material part of the strategy.
Sensitivity to the marketplace Composite definition/redefinition
• It is also important to understand the defining • While investment strategies can change over time, in most
characteristics commonly found in the marketplace for cases firms should not change the definition of a composite.
investment products. • Generally, changes in strategy result in the creation of a
• Comparability of similar strategies or products is a new composite.
fundamental objective of the Standards, and benefits • In some very rare cases, however, it may be appropriate to
current and prospective clients when firms define redefine a composite.
strategies similarly, using clear and unambiguous • If a firm determines that it is appropriate to redefine a
composite, it must disclose the date and nature of the
terminology.
change.
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Composite definition/redefinition Composite descriptions
• Changes to composites must not be applied retroactively. • Firms are also required to disclose that a complete list of
• It is required that firms disclose any changes to the name of the firm’s composites composite descriptions is available.
a composite. • Prospective clients can request to see additional
• Discontinued composites must continue to be listed on the information on the firm’s historical performance record
firm’s list of composites for five years after discontinuation. through other composites on the list.
• When requested, firms must provide a compliant • These requirements exist to provide prospective clients
presentation for any composite on the firm’s list of with a complete picture of the firm’s investment
composites (i.e., no distinction between “marketed” and performance achieved on all accounts under the firm’s
“non‐marketed” composites. discretion.
Let’s clarify these rules
• Actual: means a real portfolio
• Fee‐paying: means the client pays an advisory fee
All actual, fee paying, • Discretionary: that’s a bit more complex,…
All actual, fee paying,
discretionary accounts must be in discretionary accounts must be in
at least one composite at least one composite
Accounts can be in more than one Accounts can be in more than one
composite composite
Single account composites are Single account composites are

permitted permitted
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Mark Twain
“The difference between the right
word, and the almost right word, is
the difference between lighting and
the lightening bug.”
And so, let’s spend some time on …

Discretion!
“Discretion” is one of the most confusing “GIPS” Discretion

aspects of the GIPS standards  Discretion is the ability of the firm to implement
its intended strategy.
 If documented client-imposed restrictions
significantly hinder the firm from fully
implementing its intended strategy, the firm may
The problem: it’s a term we’re determine that the portfolio is non-discretionary.
already familiar with: legal  Nondiscretionary portfolios must not be included
discretion granting authority to in a firm’s composites.
trade
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“GIPS” Discretion Evaluating the restrictions

 There are degrees of discretion and not all client-  A client stipulates the firm cannot purchase any tobacco
stocks for its portfolio
imposed restrictions will necessarily cause a
The firm should consider if this restriction will hinder
portfolio to be non-discretionary.

the implementation of the intended strategy.
 The firm must determine if the restrictions will,  If so, the firm could either classify this portfolio as
or could, interfere with the implementation of the  non-discretionary (and all other portfolios with this
intended strategy to the extent that the portfolio restriction)
is no longer representative of the strategy  discretionary and create a composite for portfolios with
tobacco restrictions
 Where possible, the firm should label as “discretionary”
Is the portfolio
Non‐discretionary
representative of A portfolio would be considered non‐discretionary if the
the strategy? client‐imposed restrictions and/or limitations hinder or
prohibit the manager to apply their desired investment
strategy; in such cases, it’s not representative and would
Has the client imposed be labeled “non‐discretionary”.
any restrictions such
that the portfolio
wouldn’t be?
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Discretionary Rules A few examples Potential Discretionary Situations
• No sin stocks; ESG sensitivity; no links to terrorism; no weapons
• Define and document your rules for discretion in your P&P • No technology stocks
• Be consistent • No foreign companies (domestic only)
• Document any portfolio which is deemed non‐ • No bonds below “BBB”
discretionary • No “union unfriendly”
• Take your time developing – tradeoffs exist with too many • Call before you execute a trade
/ too few • Can’t sell XYZ (restricted assets)
• Discretion can be “dynamic” • Don’t buy certain companies
• Strict asset allocation rules 40% equities; 60% fixed income
Composite assets
• Composites will include all actual fee paying, discretionary
[for GIPS purposes] portfolios
• Includes their aggregated fair value as of year-end
• If a portfolio’s December return is included in the composite’s
December return, its assets are included; otherwise, they’re
not.
• Includes only actual assets managed by the firm
• Can include fee-paying accounts
• Cannot include non-discretionary portfolios
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Composite assets Discretionary leverage
• Are calculated net of discretionary leverage, and not grossed • Refers to loans taken at the investment manager’s discretion.
up, as if the leverage did not exist • For example, if the firm is managing a portfolio with $100
• Must not include uncalled committed capital for periods MM, and the firm elects to borrow $25 MM, the portfolio’s net
beginning on or after 1 January 2020. assets are $100 MM and its gross assets are $125 MM.
• Since the firm chose to lever the fund, the firm must use net
assets of $100 MM when calculating total firm and composite
assets
Non‐discretionary leverage No double‐counting assets …
• Refers to borrowings that are mandated by or undertaken by • In “composite” or “total firm” assets
the client. • E.g., If a composite holds both separate accounts
• Non-discretionary leverage is not deducted when calculating
total firm assets, composite assets, or pooled fund assets. and mutual funds, and one or more of the
• E.g., if a client gave the firm $100 MM to manage, of which separate accounts holds shares in the mutual
the client borrowed $25 MM, the amount of assets included funds, the value of those shares must be excluded
in total firm and composite assets is $125 MM. from the composite (and total firm) assets
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Handling pooled funds Definitions
• Firms that created composites that hold only one or • Broad Distribution Pooled Fund (BDPF): A pooled fund
more pooled funds may be terminated, if the strategy that is regulated under a framework that would permit
of those composites is not offered as a segregated the general public to purchase or hold the pooled
account. fund’s shares and is not exclusively offered in one‐on‐
• This applies to both “limited distribution pooled funds” one presentations
(LDPFs) and “broad distributed pooled funds” (BDPFs) • Limited Distribution Pooled Fund (LDPF): Any pooled
fund that is not a broad distribution pooled fund
Broad Distribution Pooled Funds Broad Distribution Pooled Funds
• Firms may provide a GIPS pooled fund report or a GIPS • The key point here is that firms that have many BDPFs
composite report that includes the broad distribution in strategies that are never offered to separate
pooled fund to broad distribution pooled fund accounts can discontinue the composites.
prospective investors, but is not required to do so. • And, for firms that have held off on complying because
• If the BDPF falls under regulatory advertising of the perceived onerous task to create dozens or
requirements, those rules are to be followed. hundreds of composites can adopt the Standards and
Otherwise, the Standards provides certain not have to create the composites (except in cases
requirements to advertise BDPFs. where the strategy is offered to separate accounts).
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Limited Distribution Pooled Funds GIPS Pooled Fund Report for LDPFs
• Firms must make every reasonable effort to provide a • If an LDPF is in a composite, firms may provide the
GIPS report (either a GIPS Composite Report or a GIPS associated composite report or a GIPS Pooled Fund
Pooled Fund Report) to all limited distribution pooled Report.
fund prospective investors when they initially become • Firms with LDPFs will not be required to create GIPS
prospective investors. Pooled Fund Reports for individual LDPFs.
Back‐testing, model, simulated, etc., portfolios
Pooled Fund Lists (LD & BD)
are excluded from composites
Firms must maintain:
• The results may be shown as supplemental
• A complete list of pooled fund descriptions for LDPFs.
information, but cannot be included with the
The firm is not required to include terminated LDPFs on
this list.
composite
• A complete list of BDPFs. The firm is also not required • Ensure you provide sufficient disclosures so that the
to include terminated BDPFs on this list. prospect understands the results do not belong to
actual portfolios. Don’t want to run afoul of regulators
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What’s a “minimum account size”

• The minimum is not the marketing minimum Adding and removing portfolios
• Rather, it’s the threshold, below which, the account isn’t to/from composites
representative of the strategy • Adding:
• Optional; buffers are permitted • Define the timing to add new accounts to composites
• The firm needs to define how they test for minimums in • Can vary from composite to composite
P&P (e.g., using the start- and/or end-of-month values • Timing to get the account fully invested should be considered
• Composites can have different minimums • Removing:
• Note: if all composite fall below minimum, you’ll have a • In general, we expect accounts to be removed once you’re told that
gap in performance. the account is leaving
• Need to document your rules in your P&P
You also need a rule for Fair

the timing for strategy
changes
When will accounts be
removed from the original
composite, and added to the
For periods after 1 January
new one? 2011, portfolios must be valued
in accordance with the definition
Rules tend to be similar to treatment
of fair value and the GIPS
of new and terminated accounts Valuation Principles.
25
5/21/2020
Fair
Fair value Fair
Recommended Valuation Hierarchy
• The amount at which an investment could be exchanged in a a. Quoted prices for identical or similar investments in markets that
current arm’s length transaction between willing parties in are not active (markets in which there are few transactions for the
which the parties each act knowledgeably and prudently. investment, the prices are not current, or price quotations vary
• The valuation must be determined using the objective, substantially over time and/or between market makers). If not
observable, unadjusted quoted market price for an identical available or appropriate, then investments should base on:
investment in an active market on the measurement date, if b. Market‐based inputs, other than quoted prices, that are
available. observable for the investments. If not available or appropriate,
• If not available, the valuation must represent the firm’s best use:
estimate of the market value.
Fair
Recommended Valuation Hierarchy Fair
Recommended Valuation Hierarchy
c. Investments must be valued using objective, observable, e. Subjective unobservable inputs for the investment where markets
unadjusted quoted market prices for identical investments in are not active at the measurement date. Unobservable inputs
active markets on the measurement date, if available. If not should only be used to measure fair value to the extent that
available, then use: observable inputs and prices are not available or appropriate.
d. Objective, observable quoted prices for similar investments in Unobservable inputs reflect the firm’s own assumptions about the
active markets. If not available or appropriate, then investments assumptions that market participants would use in pricing the
should use: investments and should be developed based on the best
information available under the circumstances.
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5/21/2020
Fair
Fair valuation, cont’d Any Questions?
• For periods beginning 1 Jan 2011, firms must disclose the
use of subjective unobservable inputs for valuing portfolio
investments
• Also, firms must disclose if the composite’s valuation
hierarchy materially differs from the GIPS valuation
principles’ recommended hierarchy
GIPS Math
• Composite Rates of Return
• Portfolio Rates of Return
• Dispersion
• 36‐Month Standard Deviation
• Allocating Cash for Carve‐Outs
• Estimating Transaction Costs
27
5/21/2020
Composite returns Method #1

• Must be asset-weighted Asset Weight by beginning account values, only
• Use beginning values
• Various approaches • Rather simple to implement
are permitted • Uses each account’s beginning value and return for the
month
• Multiple account values and returns, and divide by the
total of the values
Method #1 Asset‐Weighted Composite Return
Asset Weight by beginning account values, only Account BMV ROR Weighted ROR
1 100,000 1.45% 1,450
2 100,000 1.80% 1,800
  3 110,000 1.38% 1,518
v r 
n
4
5
120,000 1.60%
140,000 1.50%
1,920
2,100
   ni
BeginningValues 0 i 
RComposite 6 150,000 1.60% 2,400
  7 160,000 1.63% 2,608
  v 0i 
i 1 8 450,000 1.78% 8,010
 i 1  9 600,000 1.68%
1,930,000
10,080
31,886
ROR = 31,886 / 1,930,000 = 1.652%
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5/21/2020
Method #2 Method #2
Asset Weight by beginning values and asset‐ Asset Weight by beginning values and asset‐
weighted cash flows weighted cash flows
• Provides a slight increase in accuracy
• Requires a bit more work n  m 
 V 
  Ci , j  Wi , j   ri
0i 
i 1  j0 
R
n  m 
 V0i   Ci , j  Wi , j  
i 1  j0 
Flow‐Weighted Composite Return Method #3
Aggregate Method
Cash Flow Flow BMV + Wtd Flow-
Account
1
BMV
100,000
Flow
5000
Date Weight
10 0.667
Flows
103,333
ROR Wtd ROR
1.45% 1,498
• Treats the entire composite as a single portfolio
2 100,000 100,000 1.80% 1,800
3 110,000 5000 20 0.333 111,667 1.38% 1,541
4 120,000 120,000 1.60% 1,920
5 140,000 140,000 1.50% 2,100
6 150,000 150,000 1.60% 2,400
7 160,000 -40,000 25 0.167 153,333 1.63% 2,499
8 450,000 450,000 1.78% 8,010
9 600,000 -250,000 8 0.733 416,667 1.68% 7,000
1,930,000 1,745,000 28,769
ROR = 28,769 / 1,745,000 = 1.649%
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5/21/2020
Composite Return using the Aggregate Method Optional: Equal‐Weighted ROR
Account BMV
Cash
Flow
Flow
Date
Flow
Weight EMV ROR
• Some felt this was preferable to asset‐weighting
1
2
100,000
100,000
5000 10 0.667 106,500
101,800
1.45%
1.80%
• Not acceptable for “GIPS compliant presentations”
3
4
110,000
120,000
5000 20 0.333 116,540
121,920
1.38%
1.60%
• However, recommended, but rarely if ever shown
5
6
7
140,000
150,000
160,000 -40,000 25 0.167
142,100
152,400
122,500
1.50%
1.60%
1.63%
•ACTUALLY, probably never done: why
8
9
450,000
600,000 -250,000 8 0.733
458,000
357,000
1.78%
1.68%
not?
1,930,000 -280,000 1,678,760
1,678,760  1,930,000  (  280,000)

ROR   1649%
.
1,930,000  0.667  5,000  0.333  5,000  0167
.  (  40,000)  0.733  (  250,000)
Equal‐Weighted Return Equal‐Weighted Return
Account ROR
n 1 1.45%
r
2 1.80%
3 1.38%
i 4 1.60%
R EqualWeighted
Composite  i 1 5
6
1.50%
1.60%
n 7 1.63%
8 1.78%
9 1.68%
14.42%
ROR=14.42 / 9=1.60%
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Portfolio Rates of Return Time‐weighting
• Options: time‐weighting or money‐weighting • Applies to most managers
• Must value portfolios at least monthly
• If use a monthly method, must
• Day-weight cash flows
• Revalue for large cash flows
Large vs. Significant Cash Flows are Confusing Large cash flows …
It’s quite common • Are a rule, which requires firms to revalue portfolios at
for the terms to be least with all large flows
used in place of • The firm gets to decide what “large” means, though we
each other or typically see it at 10%
• Smaller (e.g., 5%) is fine
synonymously, but • Larger isn’t
they mean two • The rule exists to improve the accuracy of time‐weighted
different things! returns
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5/21/2020
A couple LCF FAQs The SEC’s view of the LCF Rule

• “We use the aggregate method to calculate our • While it’s not written anywhere, we believe there’s
composite returns; must we therefore use this rule an expectation that SEC‐registered firms revalue
at the composite level?” their portfolios for large cash flows.
• Yes! • The basis for this view: their “performance sweep”
• “We use the aggregate method to calculate our • If the firm doesn’t revalue, then the SEC seems to
composite returns; are we still obligated to apply want you to disclose this, as the returns you report
this rule at the portfolio level?” are less accurate
• Also, yes!
Ideally, the firm uses the exact method

• And revalues for all cash flows
• This is preferred, and if daily market prices are
available, should be employed
We revalue only for
LARGE cash flows?
Sound simple?
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5/21/2020
It can get tricky when Consider this:

there are other flows! • V0 = $100,000
• “Large” Flow: 10%+
• Testing for “large” • C1 = $20,000; “large”
• If there are also “small” • Adjusted Value with flow =
• If there are other large $121,000
• C2 = $11,000
Is C2 large?
Consider this: • V0 = $100,000 Exercise solve this:

• “Large”: 10%+
• V0 (5/31) = 100,000
• C1 = ‐$20,000;
• C1 (6/12) = 15,000
“large”
• V1 = 102,000
• Adjusted Value with
• C2 (6/21) = 5,000
flow = $81,000
• V2 = 118,000
• C2 = $9,000
• VE (6/30) = 125,000
Is C2 large?
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5/21/2020
Step #2: calculate the return for the period after the large
Solution: cash flow; since the flow is “small,” we’ll use Modified Dietz.
Step #1: calculate the return for the period up to the First, calculate the “weighting factor,” W (used start-of-day
large cash flow treatment)
CD  D  1 19  10  1 10
W    0.526316
CD 19 19
V1 102,000
R1  1   1  2% We next enter the values into our formula
V0 100,000
VE  V0  C 125,000  (102,000  15,000)  5,000
R   2.62%
V0  WC 117,000  0.526316  5,000
Step #3: we geometrically link the two subperiod returns Just imagine all the possible cash
flow scenarios; e.g.,
R   ri  1  1  ( 0.02  1)  0.262  1  1  4.68%
• Large, small, large
• Small, large, small
• Large, small, small, large
• Small, large, small, large
• Small, large, large, small
• … this can get very complicated!
If daily prices are available,
daily revaluation is a lot simpler!
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5/21/2020
Significant Cash Flows Significant Cash Flows

• Firms have the option to TEMPORARILY remove • If the firm adopts the policy, they must document it
accounts from composites when “significant” flows • It can be employed at the “Firm” level, or by composite
occur • Composites that use SGFs must include appropriate
• Why would you do this? disclosures:
• Because it may take time to (a) raise the necessary • How a significant cash flow is defined and
cash or (b) invest the cash, causing the account to not • For how long an account will be removed.
be “representative for some period
Significant Cash Flows: be cautious! An alternative: temporary accounts

• If a composite has only a few accounts (e.g., 1‐3) • When substantial flows occur, set up a temporary
and if they all experience SCFs in the same month, investment account.
the composite could have a “gap” (break) in • As new securities are purchased, move them into the
main account.
performance
• Or, when the firm is required to raise cash, move the
• No one likes gaps in performance
securities being sold and/or the cash raised into the
temporary account
• Rarely used; probably because difficult to implement
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Another SCF policy alternative Money‐weighting

• Flag assets, including cash that’s raised, as non‐managed • The use of money‐weighting has expanded.
• E.g., if securities are sold and cash is raised, causing
• If a firm manages the external cash flows and either
a) Closed-end
the allocation to cash to be substantial, move the cash b) Fixed Life
into a separate “cash account” that is “non‐managed” c) Fixed Commitment
(“non‐managed cash”), until the client draws down d) Illiquid investments as a significant part of the investment
strategy
the funds.
they may use money‐weighting instead of time‐weighting
• Required for private equity & real estate
Money‐weighting Returns for firms: gross- or net-of fees?

• Previously, the internal rate of return (IRR) was required • In prior versions of the Standards, “gross” was
• Now, other money‐weighted methods can be used (e.g.,
recommended for firms.
Modified Dietz)
• We recommend the IRR; more accurate • Firms are now recommended to report both gross‐
• Previously, firms were required to report since‐inception and net‐of‐fee
IRRs for all years shown • The U.S. Securities & Exchange Commission (SEC)
• Now, must only report since‐inception MWRR for most has certain requirements regarding reporting gross,
recent year shown when not a one‐on‐one situation
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5/21/2020
Returns for asset owners Net-of-fee

• Asset owners are required to report net‐of‐fee • Composites can have different fee schedules
returns • For net‐of‐fee, can use “actual” or “model” fees
• They can be net‐of‐external‐costs‐only, or net‐of‐ • Model fees must be appropriate to the investor
fees; must indicate which • If the firm uses model fees, the returns must be
• May show gross‐of‐fee returns as supplemental equal to or lower than those that would have been
information calculated using actual investment management
fees.
If report net-of-fee performance, must disclose: Employing estimated transaction costs

a) If any other fees are deducted in addition to investment ‐ The opportunity to use estimated transaction costs is a major
management fees and transaction costs. change with the 2020 edition of the Standards.
b) If net‐of‐fees returns are net of any performance‐based fees or ‐ It will provide great benefits.
carried interest*. ‐ The challenge: how to get it done.
c) If model or actual investment management fees are used. ‐ This method will work, though it is nontrivial, and should ideally be
d) If model investment management fees are used, and composite incorporated into the firm’s software (ideally, not a spreadsheet‐
gross‐of fees returns are not presented, the model investment based solution)
management fee used to calculate net‐of‐fees returns.*
e) If model investment management fees are used, the methodology
used to calculate net‐of‐fees returns.*
* New with the 2020 edition
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Dispersion: how consistent is the implementation
of the strategy? Standard Deviation
• A required disclosure • Most widely used measure
• Various approaches supported • Asset‐weighted or Equal‐weighted
• Portfolios must be in composite for entire period • Population or sample form ok
• N/A for ≤ 5 Portfolios •We recommend equal‐weighting
Additional options for dispersion: Other dispersion options, though VERY rare:
High‐Low or Range Quartiles/Quintiles/Deciles
• Simple to calculate and interpret • Uses spread of dollars across quartiles to provide
• Extreme returns can skew and be misleading additional insights into dispersion
• Combine with other methods to enhance presentation • Compares top performing quartile with lower
• Perhaps giving out too much detail, when not needed performing ones
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5/21/2020
To be included, accounts must be 36-Month Standard Deviation

present for full period
Included • As of January 1, 2011, firms must report
36-month standard deviation for each year
in
dispersion
Account Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec formula?
1
2 Added
Yes
No • May use sample or population form; we
recommend population
3 Yes
4 Left No
5 Added Left No
• If a period clearly has less than 36-months

6 Yes
7 Yes
of performance, do not have to disclose that

8 Left No
9 Yes
10 Yes
it’s not being shown; otherwise, need to

explain why not shown
Hold on! Standard Deviation: Risk or Dispersion Measure?

Didn’t we just
speak of
standard
Month 1 2 3 … 33 34 35 36
Composite Return 1.00% -1.07% 2.14% -0.80% -0.70% 1.25% 1.77%
deviation in the Annual
context of Account
A
Return
12.70%
dispersion?
B 12.65%
C 13.01%
D 12.99%
E 13.07%
…
X 12.73%
Y 13.08%
Z 13.25%
Composite 13.04%
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5/21/2020
Carve-outs
Any
Questions?
What is a carve-out? For example …

• As per the GIPS glossary, it’s “A portion of a • Carving out the equity portion of a
portfolio that is, by itself, representative of a balanced portfolio and put it into an Cash
distinct investment strategy. It may be used to equity composite Bonds
create a track record for a narrower mandate • You will increase the amount of
from a multiple-strategy portfolio managed to a assets in that composite, which may Stocks
broader mandate.” prove beneficial.

• It may help you demonstrate the
• Key point: that it is representative! breadth to which you are managing
that asset class, sector, etc.
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5/21/2020
Carve-outs Carve-outs
• This option can be especially attractive for The rules have changed on the carve out process.
private wealth management firms, who may have • Prior to the 2010 version, firms had the option to
many “custom” allocations, and wish to segregate allocate cash
the equity and fixed income components, to • The 2010 version changed that, only allowing firms to
better represent these returns. use carve outs if the cash was managed separately.
• This could be quite challenging, and so, most firms who
• At times, these allocations are directed by the had previously used carve-outs stopped.
client, so by carving out the asset class segments, • The 2020 version has re-introduced the option to
they can present their performance. allocate cash.
How can we allocate 1) Manage the cash separately
the cash to the • This is the ideal approach.
• Need separate cash “buckets” for each segment being
carved‐out
carved out
segments? • Can do by having subportfolios
• This can be an accounting challenge.
We will review four acceptable methods.
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5/21/2020
2) Beginning of Period Allocation Method 2) Beginning of Period Allocation Method Example
V AssetClassi Cash Equities Bonds Portfolio
AllocatedCash AssetClassi  TotalCash  Extra precision shown
VTotal , ExcludingCash Actual 10,000 50,000 40,000 100,000
to demonstrate that
RAssetClassi PlusCash  Returns 0.1% 2.0% 1.0% 1.4%
Target 0% 55% 45% 100% there can be differences
 V AssetClassi   AllocatedCash AssetClassi 
  RAssetClassi     RCash 
 V AssetClassi  AllocatedCashAssetClassi   V AssetClassi  AllocatedCash AssetClassi  VEquities 50,000
AllocatedCashEquities  TotalCash   10,000   5,556
VTotal , ExcludingCash 90,000
• This approach is easy to employ. But is it appropriate? REquitiesPlusCash 
• For example, if the target allocation is 60% stocks, 40% bonds, and if the  VEquities   AllocatedCashEquities 
actual allocation is 60% stocks, 30% bonds, and 10% cash, the stock portion   REquities     RCash  
 VEquities  AllocatedCashEquities   VEquities  AllocatedCashEquities 
will get two‐thirds of the cash, even though one might argue that all the cash
belongs to the bond portion.  50,000   5,556 
  2.0%    01%
.   1810%
.
 50,000  5,556   50,000  5,556 
• Nevertheless, the approach is simple and avoids the risk of “gaming.”
3) Define a percentage of cash to allocate 3) Define a percentage of cash to allocate
• This method is the simplest to employ. • This approach smacks of potential “gaming,” and is therefore one
• But, it may seem a bit arbitrary, unless the firm can justify the that the verifier would be expected to be sensitive to and quick to
basis for their percent. question.
• We would generally expect the percentages to be in line with the • The firm would be expected to document the basis for the
firm’s strategic or tactical cash allocation. E.g., if the portfolio is to percentage(s) used, with some justification for it.
be 60% equities, 40% fixed income, then the use of the 60% for • While this approach was permitted under the AIMR‐PPS, and may
stocks and 40% for bonds would be deemed appropriate. very well be permitted with the 2020 version, we consider it to be
• The method can be considered questionable when an extreme the weakest approach.
allocation, e.g., 95% to bonds and 5% to equities, when the • My least favorite method … I’d pick one of the others
strategic or tactical allocations are quite different.
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5/21/2020
3) Define a percentage of cash to allocate 3) Define a percentage of cash to allocate: Example
Cash Equities Bonds Portfolio
The formulas we’ll use: Actual 10,000 50,000 40,000 100,000
The 55% defined here
makes some sense, since
Returns 0.1% 2.0% 1.0% 1.4%
Target 0% 55% 45% 100% it matches the target
AllocatedCash AssetClassi  T arg et AssetClassi  VCash
Using the targets, the equity carve‐out return:
RCashPlusEquities  AllocatedCashEquities  T arg et Equities  VCash  55%  10,000  5,500
 V AssetClassi   AllocatedCashAssetClassi 
  REquities     RCash   VEquities   AllocatedCashEquities 
 V AssetClassi  AllocatedCash AssetClassi   V AssetClassi  AllocatedCashAssetClassi  RCashPlusEquities    REquities     RCash 
 VEquities  AllocatedCashEquities   VEquities  AllocatedCashEquities 
 50,000   5,500 
  2.0%    01%
.   1812%
.
 50,000  5,500   50,000  5,550 
4) Actual breakdown vs. tactical allocation 4) Actual breakdown vs. tactical allocation: Example

CashNeeded AssetClassi  T arg et AssetClassi  VPortfolio  V AssetClassi  Actual
Cash
10,000
Equities
50,000
Bonds
40,000
Portfolio
100,000
Returns 0.1% 2.0% 1.0% 1.4%
 V AssetClass   CashNeeded AssetClass  Target 0% 55% 45% 100%
RAssetClassi PlusCash   i
 RAssetClassi    i
 RCash 
 T arg et AssetClassi   T arg et AssetClassi  
CashNeeded Equities  T arg et Equities  VPortfolio  VEquities  
• This is perhaps the best way to allocate cash (my favorite) (55%  100,000)  50,000  55,000  50,000  5,000
• It considers what the tactical allocation is, vs. what was done, to  VEquities   CashNeeded Equities 
REquitiesPlusCash    REquities     RCash  
determine how much cash the segment is due.  T arg etEquities   T arg et Equities 
• The math is perhaps a bit more challenging, but not difficult.  50,000   5,000 
  2.0%    01%
.   1827%
.
 55,000   55,000 
43
5/21/2020
Additional Carve-Out Rules Additional Carve-Out Rules

• When the firm creates a carve-out of a particular • When the firm has or obtains standalone portfolios
strategy, allocates cash to the carve-out, and includes managed in the same strategy as the carve-outs with
the carve-out in a composite, the firm must create allocated cash, the firm must create a separate
carve-outs with allocated cash from all portfolios and composite for the standalone portfolios.
portfolio segments within the firm managed to that • If such a standalone portfolio exists, the firm must
strategy, and must include those carve-outs with provide certain information from its presentation in the
allocated cash in the composite. [i.e., no cherry-picking!] carve-out presentation
• The carve-out composite must contain “carve-out” in its • In addition, the firm must make prospects aware of this
name other [stand alone] composite, and offer to provide it.
Any Questions? GIPS Reports: come in several varieties

• Consist of two sections:
• Disclosures (footnotes)
• Presentation (numbers)
• Optional: supplemental information
• May provide performance‐related
information separate from GIPS
reports
44
5/21/2020
Use samples in Standards as a template Disclosure Requirements

• Each version of the Standards comes with changes
• The 2020 version is no different
• What is provided is in line w/the 2020 edition
• Will only cover required items
• If an item applies to you, you have to disclose it
Disclosure Requirements Claim of compliance statement: if verified
“[Insert name of firm/asset owner] claims compliance with the
• Unlike the Standards, themselves, that separate Global Investment Performance Standards (GIPS®) and has
asset owners and firms, for ease of presentation, we prepared and presented this report in compliance with the GIPS
combine them. Unless otherwise noted, items apply standards. [Insert name of firm/asset owner] has been
to both firms (asset managers) and asset owners independently verified for the periods [insert dates]. The
verification report(s) is/are available upon request.
• There are slightly different requirements for money‐
weighted returns. We will not cover them today.
45
5/21/2020
Claim of compliance statement: if verified Claim of compliance: verified + examinations
“A firm [An asset owner] that claims compliance with the GIPS “[Insert name of firm/asset owner] claims compliance with the
standards must establish policies and procedures for complying with Global Investment Performance Standards (GIPS®) and has
all the applicable requirements of the GIPS standards. Verification prepared and presented this report in compliance with the GIPS
provides assurance on whether the firm’s [asset owner’s] policies and standards. [Insert name of firm/asset owner] has been
procedures related to composite and pooled fund maintenance, as independently verified for the periods [insert dates].
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. Verification does not provide
assurance on the accuracy of any specific performance report.”
Claim of compliance: verified + examinations Claim of compliance: not verified
“A firm [An asset owner] that claims compliance with the GIPS standards “[Insert name of firm/asset owner] claims compliance with the Global
must establish policies and procedures for complying with all the Investment Performance Standards (GIPS®) and has prepared and
applicable requirements of the GIPS standards. Verification provides presented this report in compliance with the GIPS standards. [Insert name
assurance on whether the firm’s [asset owner’s] policies and procedures of firm/asset owner] has not been independently verified.”
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. The [insert name of composite] has had
a performance examination for the periods [insert dates]. The verification
and performance examination reports are available upon request.”
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5/21/2020
Trademark disclosure Descriptions
“GIPS® is a registered trademark of CFA Institute. CFA • Firm/asset owner definition used to determine total
Institute does not endorse or promote this organization, nor firm/asset owner assets
does it warrant the accuracy or quality of the content • Composite description
contained herein.” • Benchmark description, including
• key features of the benchmark or the name of the
benchmark for a readily recognized index or other point of
reference.
• the periodicity of the benchmark if benchmark returns are
calculated less frequently than monthly.
Miscellaneous items When presenting net‐of‐fee return

• When presenting gross‐of‐fees returns, must disclose if information, a firm must disclose
any other fees are deducted, in addition to transaction a. If any other fees are deducted in addition to investment
costs. management fees and transaction costs.
• The firm must disclose which fees and expenses other b. If NOF returns are net of any performance‐based fees or carried
than investment management fees (e.g., research costs) interest.
c. If model or actual investment management fees are used.
are separately charged by the firm to clients, if material. d. If model are used, and composite gross‐of‐fees returns are not
• The firm/asset owner must disclose or otherwise indicate presented, the model fee used to calculate net‐of‐fees returns.
the reporting currency. e. If model fees are used, disclose the methodology used to calculate
net‐of‐fees returns.
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When presenting net‐of‐external‐costs‐only returns, When presenting composite net‐of‐fees returns, the
the asset owner must disclose if any other fees are asset owner must disclose if any other fees are
deducted in addition to the transaction costs, fees and deducted in addition to the transaction costs, fees and
expenses for externally managed pooled funds, and expenses for externally managed pooled funds,
investment management fees for externally managed investment management fees for externally managed
segregated accounts. segregated accounts, and investment management
costs.
Miscellaneous items Disclose appropriate current fee schedule*
• The firm must disclose which measure of internal a. For a standalone portfolio, it must reflect the fee schedule for a
dispersion is presented. standalone portfolio managed according to that strategy.
b. Of a composite that includes carve‐outs to a prospective client for a
• If the fee schedule includes performance‐based fees or multi‐asset strategy portfolio, it must reflect the fee schedule for a
carried interest, the firm must disclose the performance‐ multi‐asset strategy portfolio managed according to that strategy.
based fee description or carried interest description. c. To a wrap fee prospect, it must reflect the total wrap fee.
• The composite inception date. d. For a pooled fund included in the composite, the firm must disclose
• The composite creation date. the pooled fund’s current fee schedule and expense ratio.
* Firm, only; will use “it” as a substitute for “current fee schedule”
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The firm must disclose that the following lists If the asset owner chooses to create

are available upon request: additional composites, or if the asset owner
a. Composite descriptions. has more than one required total fund, the
b. Pooled fund descriptions for limited distribution asset owner must disclose that the asset
pooled funds. owner’s list of total fund descriptions and
c. Broad distribution pooled funds.
composite descriptions is available
upon request.
Miscellaneous items firms/asset owners must disclose If estimated transaction costs are used, must
• That policies to value investments, calculate performance, and disclose:
prepare GIPS reports are available upon request.
• How leverage, derivatives, and short positions have been used a. That estimated transaction costs were used.
historically, if material. b. The estimated transaction costs used and how
• All significant events that would help a prospective client [the they were determined.
oversight body] interpret the GIPS composite/asset owner
report. This disclosure must be included for a minimum of one
year and for as long as it is relevant to interpreting the track
record.
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Miscellaneous items firms must disclose Miscellaneous items must disclose
• For any performance presented for periods prior to the • The minimum asset level, if any, below which portfolios are not
minimum effective compliance date that does not comply with included in the composite, and any changes to the minimum.*
the GIPS standards, the periods of non‐compliance. • If composite returns are gross or net of withholding taxes, if material.
• If the firm/asset owner is redefined, the date and description of • If the benchmark returns are net of withholding taxes if this
information is available.
the redefinition.
• If the GIPS report conforms with laws and/or regulations that conflict
• If the composite is redefined, the date and description of the with the requirements of the GIPS standards, this fact and disclose the
redefinition. manner in which the laws and/or regulations conflict with the
• Changes to the name of the composite. This disclosure must be Standards.
included for a minimum of one year and for as long as it is
relevant to interpreting the track record. * Firms, only
If carve‐outs w/allocated cash are included Miscellaneous items firms must disclose
a. Indicate carve‐out in the composite name. • The use of a sub‐advisor/external managers and the
b. Disclose that the composite includes carve‐outs with periods they were used
allocated cash. • If the composite’s valuation hierarchy materially differs
c. Disclose the policy used to allocate cash to carve‐outs. from the recommended valuation hierarchy.
d. Disclose that the GIPS composite report for the • If the firm/AO determines no appropriate benchmark for
composite of standalone portfolios is available upon the composite exists, why no benchmark is presented
request, if one exists. • If the firm has adopted a significant cash flow policy for
the composite, how the firm defines a significant cash
flow for the composite and for which periods.
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If the benchmark is changed, disclose If a custom benchmark or combination of
a. For a prospective benchmark change, the date and multiple benchmarks is used, disclose:
description of the change. Changes must be disclosed a. The benchmark components, weights, and rebalancing
for as long as returns for the prior benchmark are process, if applicable.
included in the GIPS composite report. b. The calculation methodology.
b. For a retroactive benchmark change, the date and c. Clearly label the benchmark to indicate that it is a
description of the change. Changes must be disclosed custom benchmark.
for a minimum of one year and for as long as they are
relevant to interpreting the track record.
If a portfolio‐wtd custom benchmark is used, disclose: If the total fund benchmark is a blend of asset class

a. That the benchmark is rebalanced using the weighted average benchmarks based on the policy weights of the
returns of the benchmarks of all of the portfolios included in the respective asset classes, the asset owner must
composite.
b. Rebalancing frequency
disclose:
c. The components that constitute the portfolio‐weighted custom a. The benchmarks used by each asset class along with
benchmark, including the weights that each component their weights as of the most recent annual period end.
represents, as of the most recent annual period end. b. General information regarding the investments,
d. That the components that constitute the portfolio‐weighted
structure, and/or characteristics of the benchmarks.
custom benchmark, including the weights that each component
represents, are available for prior periods upon request.
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Miscellaneous items firms/AOs must disclose Material error disclosure: Firms
• For composites with at least three annual periods of • Any change to the GIPS composite report resulting from
performance, if the three‐year annualized ex post std the correction of a material error. Following the
deviation of the composite and/or benchmark is not correction of the report, this disclosure must be included
presented because 36 monthly returns are not available. for a minimum of one year and for as long as it is relevant
• If performance from a past firm or affiliation is to interpreting the track record. This disclosure is not
presented, and for which periods. required to be included in a GIPS composite report that is
provided to a prospective client or prospective investor
that did not receive the GIPS composite report containing
the material error.
Material error disclosure: Asset Owners Miscellaneous items firms must disclose

• Any change to the GIPS asset owner report resulting from • If the firm chooses to not present the number of
the correction of a material error. Following the portfolios in the composite because there are five or
correction of the GIPS asset owner report, this disclosure fewer portfolios in the composite, that the composite
must be included for a minimum of one year and for as contains five or fewer portfolios or use similar language.
long as it is relevant to interpreting the track record • If the firm chooses to not present the internal dispersion
of individual portfolio returns because there are five or
fewer portfolios in the composite for the full year, that
the internal dispersion measure is not applicable or use
similar language.
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Miscellaneous items firms/AOs must disclose Miscellaneous items firms/AOs must disclose
• If preliminary, estimated values are used to determine • If the firm/asset owner presents additional risk
fair value. measures, describe the any additional risk measure and
• If the firm changes the type of return(s) presented for the disclose the name of the risk‐free rate, if a risk‐free rate
composite (e.g., changes from money‐weighted returns is used in the calculation of the additional risk measure.
to time‐weighted returns), must disclose the change and • Firm: If gross‐of‐fees or net‐of‐fees returns are used to
the date of the change. This disclosure must be included calculate presented risk measures.
for a minimum of one year and for as long as it is relevant • Asset owner: if gross‐of‐fees, net‐of‐external‐costs‐only,
to interpreting the track record. or net‐of‐fees returns are used to calculate presented risk
measures.
For real estate investments that are directly owned, Miscellaneous items firms must disclose

the asset owner must disclose that • For overlay strategy composites, the methodology used to
• external valuations are obtained and the frequency calculate composite overlay exposure and if collateral and
with which they are obtained; collateral income are reflected in the composite returns.
• For real estate investments that are not in a real estate open‐end
• or that the asset owner relies on valuations from fund, that external valuations are obtained, and the frequency
financial statement audits. with which they are obtained, or that the firm relies on valuations
from financial statement audits.
• For wrap fee composites, when the firm presents pure gross‐of‐
fees returns, that pure gross‐of‐fees returns do not reflect the
deduction of transaction costs.
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Firms: When the GIPS report includes theoretical When the GIPS composite report includes theoretical
performance as supplemental information, disclose: performance as supplemental information, disclose:
a. That the results are theoretical, not based on the c. Whether the theoretical performance reflects the
performance of actual assets, and if the it was derived from deduction of actual or estimated investment
the retroactive or prospective application of a model. management fees, transaction costs, or other fees and
b. A basic description of the methodology and assumptions charges that an actual client portfolio would have paid
used to calculate the theoretical performance sufficient for or will pay.
the prospect to interpret the theoretical performance, d. Clearly label the theoretical performance as
including if it is based on model performance, backtested supplemental information
performance, or hypothetical performance.
Asset Owners: When the GIPS report includes theoretical When the GIPS composite report includes theoretical
performance as supplemental information, disclose: performance as supplemental information, disclose:
a. That the results are theoretical, not based on the c. Whether the theoretical performance reflects the
performance of actual assets, and if the it was derived from deduction of actual or estimated investment
the retroactive or prospective application of a model. management fees, investment management costs, and
b. A basic description of the methodology and assumptions transaction costs.
used to calculate the theoretical performance sufficient for d. Clearly label the theoretical performance as
the oversight body to interpret the theoretical
supplemental information
performance, including if it is based on model performance,
backtested performance, or hypothetical performance.
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Presentation Requirements The firm must present, in each GIPS report:

a. At least five years of performance (or for the period since the
• The Standards differentiate between the footnotes composite inception date if the composite has been in existence
less than five years) that meets the requirements of the GIPS
(“disclosures”) and the numbers.
standards. After the firm presents a minimum of five years of GIPS‐
compliant performance (or for the period since the composite
inception date if the composite has been in existence less than five
years), the firm must present an additional year of performance
each year, building up to a minimum of 10 years of GIPS‐compliant
performance.
The firm must present, in each GIPS report: The firm must present, in each GIPS report:

b. Composite returns for each annual period. g. Composite assets as of each annual period end.
c. When the initial period is less than a full year, the return from the h. Total firm assets as of each annual period end.
composite inception date through the initial annual period end. i. A measure of internal dispersion of individual portfolio annual
d. When the composite terminates, the return from the last annual returns for each annual period. If the composite contains five or
period end through the composite termination date. fewer portfolios for the full year, a measure of internal dispersion is
e. The total return for the benchmark for each annual period and for not required.
all other periods for which composite returns are presented, unless j. For composites for which monthly composite returns are available,
the firm determines there is no appropriate benchmark. the three‐year annualized ex post standard deviation (using
f. The number of portfolios in the composite as of each annual period monthly returns) of the composite and the benchmark as of each
end. If the composite contains five or fewer portfolios at period annual period end.
end, the number of portfolios is not required.
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The asset owner must present, in each GIPS report: The asset owner must present, in each GIPS report:

a. At least one year of performance (or for the period since the total b. For total funds, total fund returns that are net‐of‐fees.
fund or composite inception date if the total fund or composite has c. Total fund or composite returns for each annual period.
been in existence less than one year) that meets the requirements d. When the initial period is less than a full year, the return from the total
of the GIPS standards. After the asset owner presents a minimum fund or composite inception date through the initial annual period end.
of one year of GIPS‐compliant performance (or for the period since e. When the total fund or composite terminates, the return from the last
the total fund or composite inception date if the total fund or annual period end through the total fund termination date or composite
termination date.
composite has been in existence less than one year), the asset
f. The total return for the benchmark for each annual period and for all
owner must present an additional year of performance each year, other periods for which total fund or composite returns are presented,
building up to a minimum of 10 years of GIPS‐compliant unless the asset owner determines there is no appropriate benchmark.
performance.
The asset owner must present, in each GIPS report: Firms: Miscellaneous information to present

g. The number of total funds or portfolios in the composite as of each • The total fair value percentage of composite assets that were
annual period end. valued using subjective unobservable inputs as of the most recent
h. Total fund assets or composite assets as of each annual period end. annual period end, if such investments represent a material
i. Total asset owner assets as of each annual period end. amount of composite assets.
j. For total funds or composites for which monthly total fund or
• Must clearly label or identify the periods that are presented and if
composite returns are available, the three‐year annualized ex post
composite returns are gross‐of‐fees or net‐of‐fees.
standard deviation (using monthly returns) of the total fund or
• If the firm includes more than one benchmark in the GIPS
composite and the benchmark as of each annual period end
composite report, the firm must present and disclose all required
information for all benchmarks presented.
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A/Os: Miscellaneous information to present Miscellaneous information to present
• The total fair value percentage of total fund or composite assets • If the composite loses all of its member portfolios, the composite
that were valued using subjective unobservable inputs as of the track record must end. If portfolios are later added to the
most recent annual period end, if such investments represent a composite, the composite track record must restart. The periods
material amount of total fund/composite assets. both before and after the break in track record must be presented,
• Must clearly label or identify the periods that are presented and if with the break in performance clearly shown. The firm/asset
composite returns are gross‐of‐fees, net‐of‐external‐cost‐only, or owner must not link performance prior to the break in track record
net‐of‐fees. to the performance after the break in track record.
• If the asset owner includes more than one benchmark in the GIPS • All required and recommended information in the GIPS composite
report, the asset owner must present and disclose all required report must be presented in the same currency.
information for all benchmarks presented.
Firms: Miscellaneous information to present Firms: If presenting uncalled committed capital or a
• If the composite includes carve‐outs with allocated cash, the firm combination of composite assets and uncalled
must present the percentage of composite assets represented by committed capital
carve‐outs with allocated cash as of each annual period end. a. Present composite uncalled committed capital for the same periods
• If the composite includes non‐fee‐paying portfolios, the firm must for which the combination of composite assets and composite
present the percentage of composite assets represented by non‐ uncalled committed capital is presented.
fee‐paying portfolios as of each annual period end when net‐of‐ b. Clearly label composite uncalled committed capital as such.
fees returns are presented and are calculated using actual c. Clearly label the combination of composite assets and composite
investment management fees. uncalled committed capital as such.
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Firms: If presenting firm‐wide uncalled committed Firms: If presenting advisory‐only assets, or a combination
capital or combination of total firm assets and firm‐ of composite and advisory‐only assets that reflect the
wide committed capital composite’s investment mandate, objective, or strategy,
a. Present advisory‐only assets that reflect the composite’s investment
a. Present firm‐wide uncalled committed capital for the same periods
mandate, objective, or strategy for the same periods for which the
for which the combination of total firm assets and firm‐wide combination of composite assets and advisory‐only assets that reflect
uncalled committed capital is presented. the composite’s investment mandate, objective, or strategy is presented.
b. Clearly label firm‐wide uncalled committed capital as such. b. Clearly label advisory‐only assets that reflect the composite’s investment
c. Clearly label the combination of total firm assets and firm‐wide mandate, objective, or strategy as such.
uncalled committed capital as such. c. Clearly label the combination of composite assets and advisory‐only
assets that reflect the composite’s investment mandate, objective, or
strategy as such.
If the firm chooses to present firm‐wide advisory‐only assets When presenting performance of a composite that includes

or a combination of total firm and firm‐wide advisory‐only carve‐outs w/allocated cash and also has a composite of
assets, the firm must: standalone portfolios managed to the same strategy, firms
a. Present firm‐wide advisory‐only assets for the same periods for must present for the composite of standalone portfolios:
which the combination of total firm assets and firm‐wide a. The composite returns for each annual period for which the
advisory‐only assets is presented. composite of standalone portfolios exists, and
b. Clearly label firm‐wide advisory‐only assets as such. b. The composite assets as of each annual period end for which
c. Clearly label the combination of total firm assets and firm‐wide the composite of standalone portfolios exists.
advisory‐only assets as such. This information must be included in the GIPS composite report of
the composite that includes carve‐outs with allocated cash.
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For wrap fee composites, when presenting performance to a For wrap fee composites, when presenting pure
wrap fee prospective client, the firm must present: gross‐of‐fees returns, firms must:
a. The composite that includes the performance of all actual wrap
a. Clearly label returns as pure gross‐of‐fees.
fee portfolios, if any, managed according to the composite
b. Identify pure gross‐of‐fees returns as supplemental
investment mandate, objective, or strategy, regardless of the
information.
wrap fee sponsor.
b. Composite performance that is net of the entire wrap fee.
c. The percentage of composite assets represented by wrap fee
portfolios as of each annual period end.
Any supplemental information included in the Firms: For overlay strategy composites
GIPS report • The firm must present composite overlay exposure as of each
a. Must relate directly to the composite. annual period end. For those periods for which the firm presents
b. Must not contradict or conflict with the required or composite overlay exposure, the firm may choose not to present
recommended information in the GIPS composite report. composite assets
c. Must be clearly labeled as supplemental information. • The firm is not required to present total firm assets and may
instead choose to present total firm overlay exposure as of each
annual period end
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Where’s the GIPS report?
Distribution of
If the GIPS materials are included in the firm’s
GIPS reports marketing materials or “pitch books,” they are
• Firms are required to “be able to demonstrate how required to indicate that the materials are included.
it made every reasonable effort to provide” the • Perhaps in a Table of Contents
appropriate GIPS composite reports and/or pooled • Or in a cover letter
fund reports to prospects. • Or, with tabs
• This is something verifiers will review. • Or, ???
Supplemental information
• Supplemental information is any performance‐related
information that supplements or enhances a GIPS‐
compliant presentation (i.e., any additional
performance‐related information beyond what GIPS
requires or recommends)
12 MONTHS • Does not include general information regarding the
firm, or the investment strategy or process
• Limited to information within the GIPS presentation
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Supplemental information and verification GIPS Advertising

• Supplemental information is not subject to verification Guidelines
under the GIPS standards
• The firm is responsible to ensure that it conforms with Don’t replace Standards or exempt
the ethical principles and spirit of the Standards firms from Standards’ provisions
• Don’t replace laws/regulations covering performance
Verification
statement advertising
• Compliance, as well as performance, should approve
advertising materials
GIPS Advertising GIPS Advertising

Guidelines Guidelines
Rules for two types of Note!
advertising:
• The advertising guidelines have expanded considerably, and we
• With numbers simply do not have time to review them in detail.
• If you are going to have an advertisement refer to the GIPS
• Without numbers standards, ensure you familiarize yourself with the specifics of
these rules
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An approach to become compliant
• You will need support from senior management, as
compliance is not free
• Develop the “why” behind compliance. Typically,
Any • Identify the benefits
• Gain marketing advantage
Questions? •
•
Avoid marketed disadvantage
Standards are “best practice,” and who settles for second
best?
• Become familiar with the Standards
More to do … An approach to become compliant
• Ideally, compliance is a “team” approach: • What will the firm be? (defines scope of effort)
• Head of performance • What composites will you need?
• Compliance • How far back will you go?
• Portfolio management • What will your rules of discretion be?
• Marketing/Sales
• What P&P apply to you?
• Operations
• IT • Do you have historical data to support?
• Assess where stand vis‐à‐vis Standards; a “gap • How/where will calculations be done?
analysis” so to speak • Where will composites be maintained?
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Get help! NEXT TOPIC:
• Identify who your verifier will be; they can provide
assistance (e.g., we conduct GPS (GIPS Planning
Sessions) for new clients
• Consider a specialty consulting firm to assist, especially
if the breadth of work is significant
Verification Verification
• Another confusing concept
• Verification does not verify a firm’s claim of • Must be conducted by an independent third‐party,
compliance although internal reviews are also encouraged
• It assesses whether (1) the firm has complied with all • Composite examinations are an option
the GIPS composite construction requirements on a • Must have had verification done first (or
firm‐wide basis and (2) the firm’s firm’s policies and concurrently)
procedures are designed to calculate and present • Not a form of verification
performance in compliance with the standards.
• Done at the firm‐level
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Why is verification important? Verifier independence

-The Standards • Firms must gain an understanding of the verifier’s
are complex. policies for maintaining independence and must
- Many firms consider the verifier’s assessment of independence
think they’re
• This means verifiers will have to make available:
compliant, but
• Their policies for maintaining independence
they aren’t.
• Their assessment of independence
- Helps you avoid
to their clients.
a marketing
disadvantage.
What about composite examinations?
Questions?
• These are essentially audits of the numbers you’re
reporting
• We generally discourage them, though are
absolutely fine to conduct for our clients
• This can be a discussion topic during initial
meetings with your verifier
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Must have written What we expect to see in your P&P

Policies & Procedures  How you determine which composite(s) an account goes into
 What steps are taken?
 Who is involved in the decision?
 Rules for investment discretion [non-discretion]
 They need to be clear enough that interpretations are
consistent
 Ambiguous rules lead to confusion and inconsistent application
of policy
 These rules can change, though changes should be noted
 The firm’s rules to create composites
 What is the process?
 Who is involved?
What we expect to see in your P&P What we expect to see in your P&P
 How the firm assigns portfolios to composites; timing for  Interest/dividend accruals
 Inclusion (new portfolios)  How the firm accrues for income (req’d, if applicable)
 Exclusion (terminated portfolios)  How the firm accrues for dividends (optional)
 Changes in strategy  Market valuation (“fair valuation”): what are the rules?
 Ideally, include examples. E.g.,  The Standards provide a recommended hierarchy.
 If a portfolio is funded on May 15, it will be added to the  Most compliant firms seem to follow this guidance
composite on June 30  If your firm does, indicate this; if not, then what are your
 If we are notified by a client to terminate the relationship on rules
November 20, the portfolio is removed as of October 31  E.g., if a market price is not available for a security, what is
 If a client directs us to change their strategy on February 20, your procedure to price the security?
it will be removed from the original composite as of January
31, and added to the new composite on March 31
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Calculations explained in your P&P Calculations explained in your P&P

 Calculation of portfolio returns  How is dispersion calculated?
 What method do you use? TWR, MWR  What formula do you use? Has it changed?
 What’s the frequency (daily, monthly)?  If “equal-weighted” standard deviation, is it the population or sample
method?
 If monthly, that you day-weight and revalue for large flows
 For your 36-month standard deviation, do you use sample or
 How cash flows are treated (e.g., start-of-day/end-of-day)
population?
 If multiple methods are used, how and when?
 Note: we generally find the population method used more often
 If calculation formulas have changed, when and what was
than sample, and for good reason
previously done?
 We can argue that for both dispersion and the 36-month standard
 Calculation of composite returns deviation, you are measuring standard deviation for the population, not a
 What method do you follow? sample
 If multiple, where and how?  For dispersion, it’s against all accounts present the full year
 If the method changed, when and what was the prior method?  For 36-month std dev, it’s for all of the past 36 months
 Error correction [don’t need to follow GS’s 4-levels]  Portability: if the firm has undergone situations where
 Typically, what constitutes “material” and “immaterial” is records from prior firms were “ported over,”
sufficient  You should document what these were
 Need to cover all items on your GIPS reports  Whether the rules of portability were met
 Need to specify what steps you take when encountering each  What history was converted to the new firm
 If “material,” in addition to providing corrected materials to  Significant events
active prospects and clients who received the prior version,  Document what would constitute a “significant” event.
ensure you provide to the current verifier and, if a different  E.g., the departure of the CIO
verifier handled the period being corrected, them, too!  Ideally, document which have occurred
 You should maintain a log of errors, to identify (a) what the
error was, (b) the level (e.g., “material”), and (c) what actions
were taken.
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 Leverage, derivatives, shorts, should explain how and  How ensure existence & ownership of client assets
where they are employed, including the types that are used  Note: this was a requirement under the “2010” version; it no
 Define “materiality” in terms of including details in the longer is
firm’s GIPS reports  Significant cash flow policy
 Speaking of materiality, P&P should explain how the firm  If the firm has one, what are the specifics in terms of (a) size
that would cause the removal of accounts (e.g., 20% of the
defines for all disclosures that are dependent on it (e.g., prior month’s value) and for how long the account will be out
withholding taxes)  Note that (a) rules (i.e., the size and timing) can vary from
composite to composite and (b) you do not have to apply to all
composites
 Be careful if adopt for composites with only a very few
portfolios; don’t want to have gaps in performance!
 How the firm ensures that reasonable efforts are made to  Compliant firms must create policies and procedures to
provide prospects with a presentation monitor and identify changes and additions to all of GS,
 The 2020 rule is that they are to be provided when they interpretations, and Q&As published by CFA Institute and
“initially become a prospect” the GIPS standards governing bodies
 Define how an interested party becomes a prospect.  Compliant firms must also create policies and procedures
Generally, to monitor and identify changes and additions to laws and
 When you determine that you can meet their needs regulations regarding the calculation and presentation of
 They qualify
performance
 For both of these, you’ll want to indicate that (a) you do these
things and (b) how you do them.
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Recommended policies Recommended policies

 To register annually w/CFA Institute, by 30 June  If subject to withholding taxes, how handled
 To explain how you decide what benchmarks to  On recordkeeping, which can simply point to a more
use; what the process is detailed policy that explains procedures to ensure
 Have a policy to explain how frequently comply with regulators
presentations are updated, and what the process  What formula(s) used for dispersion and 36-month
is, as well as who handles it standard deviation; indicate which form (population
or sample)
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5/21/2020

Fundamentals of Performance What we’ll cover:

What we’ll cover: What we’ll cover:

Firms Asset Owners Over time, we’ve seen many changes to

While I will reference some of the 2020 changes So, what are the GIPS standards?

What are their objectives?

Available in hard copy, as well as soft:

In the past … • No standards for how to

A brief history … A brief history …

A brief history … We have a true, global standard

GIPS Standards’ SPONSORS

O ther reasons include: Questions?

Firm Definition: Adopting at the broadest level

Definition – Composite: Importance of composites

Single account composites are Single account composites are

And so, let’s spend some time on …

“Discretion” is one of the most confusing “GIPS” Discretion

“GIPS” Discretion Evaluating the restrictions

What’s a “minimum account size”

You also need a rule for Fair

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Composite returns Method #1

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1,678,760  1,930,000  (  280,000)

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A couple LCF FAQs The SEC’s view of the LCF Rule

Ideally, the firm uses the exact method

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It can get tricky when Consider this:

Consider this: • V0 = $100,000 Exercise solve this:

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Significant Cash Flows Significant Cash Flows

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Significant Cash Flows: be cautious! An alternative: temporary accounts

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Another SCF policy alternative Money‐weighting

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Money‐weighting Returns for firms: gross- or net-of fees?

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Returns for asset owners Net-of-fee

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If report net-of-fee performance, must disclose: Employing estimated transaction costs

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To be included, accounts must be 36-Month Standard Deviation

• If a period clearly has less than 36-months

of performance, do not have to disclose that