Discuss the GIPS rules for calculating returns, covering how fees and expenses, cash and cash equivalents, and external cash flows are treated
The idea
Returns must be time-weighted, removing the effect of external cash flows, the client contributions and withdrawals the manager does not control. Portfolios must be valued at least monthly and on the date of any large external cash flow, with sub-period returns linked geometrically; money-weighted returns are allowed only in narrow cases, such as closed-end, fixed-life or illiquid strategies where the firm controls the flows. Cash and cash equivalents held in the portfolio count in its return, since holding cash is an investment decision. Gross-of-fees returns deduct actual trading costs; net-of-fees returns also deduct management and any performance fees. If trading costs cannot be separated from a bundled fee, the bundled fee, or the part containing them, is deducted from gross returns.
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- Discuss what the GIPS standards aim to achieve, whom they cover, and how they help investment managers as well as prospective clients and investors
- Explain the basic requirements for claiming GIPS compliance, including how the firm is defined and how it defines discretion
- Explain the valuation hierarchy that the GIPS standards recommend
- Explain the GIPS rules for calculating composite returns, including the permitted ways of asset-weighting the returns of member portfolios
- Explain what makes a portfolio discretionary for composite construction and, from a set of facts, judge whether a given portfolio is likely to qualify
- Explain how composites are defined around a shared mandate, objective or strategy, and why this matters
- Explain the GIPS composite construction rules, covering when portfolios may move between composites, when new portfolios must be added and when terminated ones must be removed
- Explain what the GIPS standards require in presenting and reporting performance
- Explain when a new or acquiring firm may link to, or show as its own history, the performance record of a prior firm or affiliation
- Discuss why firms seek GIPS verification, what it covers and how it is carried out