FIRMA 21st National Training Conference
April 18, 2007
The GIPS® Standards:
Key Issue and Considerations
Karyn D. Vincent, CFA, CIPM
Topics
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Overview of the GIPS standards
AIMR-PPS standards: where did they go?
What does it mean to comply with the GIPS
standards?
Overview of requirements of the GIPS standards
Current developments with the GIPS standards
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Overview of the GIPS standards
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The Global Investment Performance Standards
(GIPS®) are a set of voluntary standards developed by
CFA Institute, in partnership with other organizations
worldwide
CFA Institute, with corporate headquarters in
Charlottesville, VA, is the professional organization
for Chartered Financial Analysts (CFA
charterholders)
 84,000+ members in 128 countries
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What about the AIMR-PPS standards?
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Since the early 1990s, firms in the US and Canada
claimed compliance with the AIMR-PPS standards
 CFA Institute was previously named the Association for
Investment Management and Research (AIMR)
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The AIMR-PPS standards were one of many sets of
country-specific standards used throughout the world
Effective January 1, 2006, all country-specific
standards converged to create one standard used
globally: the GIPS standards
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Transition to the GIPS standards
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Once a firm presents performance for periods that
begin after January 1, 2006, a firm may no longer
claim compliance with the AIMR-PPS standards
A firm that previously claimed compliance with the
AIMR-PPS standards is granted full reciprocity for
historical periods
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Transition to the GIPS standards: is it
difficult?
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Transitioning from the AIMR-PPS standards to the
GIPS standards is a simple exercise for most firms
 The GIPS standards are based primarily on the AIMR-PPS
standards
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Most differences are related to disclosures
 No differences in calculations
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Why claim compliance with the GIPS
standards?
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Claiming compliance is voluntary, but
 In the U.S., claiming compliance with the GIPS standards
is required by many client, sponsors, and consultants
 A majority of large U.S. firms claim compliance
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The SEC does not require compliance, but if a firm
claims compliance, the SEC may test the firm’s claim
of compliance
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Claiming compliance with the GIPS
standards: what does it mean?
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Helps assure investors that performance information
is both complete and fairly presented
Requires ongoing commitment to a voluntary set of
evolving ethical standards
Requires an ongoing commitment of resources
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Periods of compliance
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A firm must be in compliance for a minimum of five
years
 If the firm has at least five years of history
The firm must then work towards building a 10 year
compliant track record
If the firm wishes to present more than an initial five
year track record, the firm must be in compliance as
of January 1, 2000 at a minimum
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Periods of compliance
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For periods prior to January 1, 2000, performance
does not have to be in compliance with the GIPS
standards
 If prior periods are not in compliance, must disclose the
periods of non-compliance, and why the track record is not
in compliance
 E.g. For periods prior to January 1, 1999 performance of a
representative account is used.
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These rules are only for a firm that did not previously
claim compliance with the AIMR-PPS standards
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Periods of compliance
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If a firm previously claimed compliance with the
AIMR-PPS standards
 the firm must be in compliance as of January 1, 1993 at a
minimum
 The firm must continue to show at least a 10 year track
record
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Key concepts of the GIPS standards
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Firm definition
Creating composites
Calculating account-level returns
Calculating composite-level returns
Preparing compliant presentations
Fundamentals of compliance
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Firm definition
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A firm must be in compliance on a firm-wide basis
For the purpose of complying with the GIPS
standards, the firm must be defined according to how
the firm, subsidiary, or division is held out and
marketed to clients and should be a distinct business
entity
A firm may no longer be defined based solely on
legal entity
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Firm definition
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The firm definition determines the universe of
portfolios that must be considered for inclusion in a
composite
From this universe, all actual, fee paying,
discretionary accounts must be included in at least
one composite
 A composite is a grouping of accounts managed in a similar
style
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Actual accounts
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Only actual accounts may be included in composites
Model or hypothetical accounts may not be included
in composites
 Model results may be shown as supplemental information,
but such performance may not be linked to actual results
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Non-fee paying accounts
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Non-fee paying accounts may be excluded from
composites
If a firm wishes to, they may include non-fee paying
accounts in composites, with appropriate disclosures
 Must disclose, for each period, the % of the composite
represented by non-fee paying portfolios
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Discretion
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The firm must define discretion
Discretion is the ability of the firm to manage an
account in its intended strategy
 Just because an account is legally discretionary does not
mean it is discretionary for GIPS-compliance purposes
 Must consider restrictions and mandates
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However discretion is defined, it must be applied
consistently
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Composite criteria
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Composites must be created that represent the firm’s
strategies
Accounts must be assigned to composites in
accordance with established criteria
 E.g. new accounts are included in a composite the first full
month under management
 Only fully discretionary accounts are included in
composites; accounts with any kind of restriction are
considered excluded accounts and are not included in
composites
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Account-level calculations
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Account-level returns must use a time weighted rate
of return
 Securities must be valued at market value, not cost
Performance must be calculated at least monthly as of
January 1, 2001
If performance is calculated monthly, cash flows must
be day weighted as of January 1, 2005
 Mid-month assumption could be used previously
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Composite-level calculations
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Composite-level returns must be calculated by
weighting account returns by beginning market value,
or a method that combined beginning market value
plus cash flows during the period
As of January 1, 2006 composites must be calculated
at least quarterly
 As of January 1, 2010, composites must be calculated at
least monthly
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Composite presentations
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The next step is to prepare a compliant presentation
for each composite
The Standards require certain composite information
and disclosures, for the required periods previously
described
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Required annual disclosures
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Annual composite returns
 Gross (recommended) only, net only, or both
Total return for an appropriate benchmark(s)
 If no benchmark, disclose why
Measure of internal dispersion (or n/a if < 5 portfolios
included in the composite for the full year)
Composite assets as well as number of portfolios in
the composite at the end of period (or n/a if < 5)
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Required annual disclosures
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Total firm assets or the % of composite assets to total firm
assets at end of period
Percentage of non-fee-paying portfolios (if any) at the end of
period
If carve-outs are included in the composite, the % of the
composite the carve-outs represent (for periods that begin after
January 1, 2006)
If bundled-fee portfolios are included in the composite, the %
of composite assets that is made up of bundled fee portfolios
(for periods that begin after January 1, 2006)
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Then come the disclosures….
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Compliance statement
 ABC Company has prepared and presented this report in compliance
with the Global Investment Performance Standards (GIPS®).
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Definition of the “firm” for the purpose of complying with the
GIPS standards
The availability of a complete list and description of firm
composites
Composite minimum size, if applicable, and any change to the
minimum
 If no minimum, no requirement to disclose that there is no composite
minimum
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Then come the disclosures….
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Currency used to express performance
Presence, use, and extent of leverage or derivatives (if
material)
Returns must be clearly labeled as gross- or net-offees
Relevant details about withholding taxes
Known inconsistencies in exchange rates (benchmark
versus composite, and portfolios within the
composite)
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Then come the disclosures….
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If performance for periods prior to January 1, 2000 does not
comply with GIPS
If any part of the presentation conforms with local laws and
regulations that differ from GIPS
If carve-outs are used, the policy used to allocate cash
If composite contains portfolios with bundled fees, the types of
fees included in the bundled fee
Appropriate fee schedule
 Referencing the fee schedule’s availability in Form ADV or
another document does not meet the requirement
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Then come the disclosures….
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If gross returns are presented, any other fees
deducted (in addition to trading expenses)
If net returns are presented, any other fees deducted
(in addition to trading and management)
Benchmarks
 If no benchmark is disclosed, explain why
 If the benchmark changed, the date and reason for the
change
 If custom/ combination benchmark is used, a description of
the creation and rebalancing process.
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Then come the disclosures….
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That additional information regarding policies for calculating
and reporting returns is available upon request
The use of sub-advisors and the periods used (for periods that
begin after 1 January 2006)
All significant events that would help a prospective client
interpret the performance presentation
The composite’s description
If the firm was redefined, the date and reason for redefinition
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Then come the disclosures….
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If the composite was redefined, the date and nature of
the change
Any changes in composite name
Composite creation date (the date the portfolios were
first grouped to create a composite)
If, prior to January 1, 2010 calendar month-end
portfolio valuations or valuations on the last business
day are not used
Which dispersion measure is presented
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Compliant presentations
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Once a firm claims compliance with the GIPS
standards, the firm must attempt to provide a
compliant presentation to all prospective clients
Sample compliant presentation follows
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Sample compliant presentation
Other Fundamental Responsibilities
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Firms are required to document, in writing, policies
and procedures used in establishing and maintaining
compliance with all the applicable requirements of
the GIPS standards
 Ensure all requirements are addressed
Must provide a list and description of composites
upon request
 Discontinued composites must stay on the list for 5 years
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Other Fundamental Responsibilities
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Must be able to provide a compliant presentation for
all composites on list
 Must include terminated composites
Must comply with all requirements including updates,
reports, guidance statements, interpretations, or
clarifications
 All guidance issued to date is included in the GIPS
Handbook
 Purchasing information is on CFA Institute’s website
(www.cfainstitute.org)
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Other asset classes
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Asset class guidance specific to
 Private equity
 Real estate
 Wrap fee/separately managed accounts
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Guidance Statements
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Performance Examination Guidance Statement
 Recently finalized
 Provides guidance to verifiers who conduct composite
specific performance examinations
 Only verification guidance is included in the GIPS
standards
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Reminder: only a firm is verified
 Verification is a firm-wide test of compliance with the
GIPS standards
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Guidance Statements
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Leverage and Derivatives Guidance Statement
 Currently being reconsidered by the Interpretations
Subcommittee
 Stay tuned for additional information
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Portfolio Recordkeeping
 Addresses the requirement to maintain all data and
information necessary to support a firm’s performance
presentation (1.A.1.)
 Guidance should be issued shortly
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Guidance Statements
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Error Correction Guidance Statement
 GIPS standards do not address the issue of accuracy
 Guidance for how a firm should handle errors or
restatements of performance
 Guidance should be issued later this year
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Appointed
by
CFA Institute
Appointed
by
Investment
Manager
Interpretations
RIPS-Asia Pac
Director
Verification/
Practitioner
GIPS Executive
Committee
RIPS-Americas
Council Chair
Investor/Consultant
RIPS-EMEA
Country
Sponsors
Chair
Asia
Pacific
RIPS
GIPS Council
EMEA
RIPS
Americas
RIPS
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The CIPM Program
(previously named the CGIPS Program)
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Specialized, practice-based study and exam program
 Professional ethics
 Performance measurement, attribution, and appraisal
 The GIPS standards
Must pass two exams
 Principles and Expert
Must also have two years of performance-related
experience
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The CIPM Program
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Next enrollment period is from May - July
Next testing window is from September - October
Fee of $975 includes
 Enrollment
 Online curriculum Access
 One examination seating
For further information
 Web: www.cfainstitute.org/cipm
 E-mail: [email protected]
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Available Resources
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CFA Institute website
(www.cfainstitute.org/centre/ips)
Helpdesk - Q&As ([email protected])
E-mail alert list ([email protected])
VPS Newsletters
([email protected])
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Your Questions
Contact info
Karyn D. Vincent, CFA
Vincent Performance Services LLC
Portland, Oregon
503-288-2704
[email protected]
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