Gips Compliance

Section: GIPS Compliance — Standards and Requirements Estimated study time: 45 minutes Content: The Global Investment Performance Standards (GIPS) are a set of ethical principles created by CFA Institute to ensure consistency and fairness in the reporting of investment performance. GIPS compliance is voluntary, but once a firm claims compliance, it must comply with all requirements and apply the standards on a firm-wide basis. Firms cannot selectively comply with GIPS for only some products or composites. A composite is the centerpiece of GIPS. It is an aggregation of one or more portfolios managed according to a similar investment mandate, objective, or strategy. Every fee-paying, discretionary portfolio must be included in at least one composite. Non-discretionary portfolios and model portfolios are excluded from composites. Composites must be defined before a new period begins — firms cannot retroactively move underperforming accounts into different composites. The composite definition must document the strategy's investment objective and constraints, and any changes to composite definitions must be disclosed. Performance must be calculated using time-weighted returns (TWR), which eliminate the distorting effect of client cash flows. The modified Dietz method or daily valuation are the two primary TWR calculation approaches. Portfolios must be valued at least monthly (and for periods beginning January 1, 2010, daily) or at the time of large external cash flows. Money-weighted returns (MWRI / IRR) are permitted for private equity and real estate composites where the manager controls the timing of cash flows. Required disclosures under GIPS are extensive. Firms must disclose: whether the composite contains carve-outs, the composite creation date, the minimum asset level for inclusion, the treatment of withholding taxes, the list of all composites, the number of portfolios in…