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
The idea
Portfolios may not move from one composite to another unless the client changes the mandate or the composite is redefined, with documentation; moving them because of performance is prohibited, and past results stay in the original composite. New portfolios must join according to a documented policy applied consistently, typically at the start of the first full measurement period after the firm has discretion and the assets are invested as intended. Terminated portfolios stay in the composite's history up to the last full measurement period they were managed; removing them would create survivorship bias. Firms may set minimum asset levels or significant cash flow policies that temporarily remove portfolios, but these must be defined in advance and never applied retroactively.
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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
- Discuss the GIPS rules for calculating returns, covering how fees and expenses, cash and cash equivalents, and external cash flows are treated
- 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 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