Library/CFA (Chartered Financial Analyst)/SchweserNotes™ 2022 Level I CFA® Book 5: Portfolio Management and Ethical and Professional Standards/Reading 59: Introduction to the Global Investment Performance Standards (GIPS)

Reading 59: Introduction to the Global Investment Performance Standards (GIPS)

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Purpose and Scope of GIPS5 min

GIPS was established to create a standardized methodology for reporting investment performance, ensuring fair representation and full disclosure. Before GIPS, firms could use misleading practices such as selecting top-performing portfolios (representative accounts), excluding terminated accounts (survivorship bias), or choosing favorable time periods. GIPS makes performance comparable across firms, benefiting prospective clients and oversight bodies. Compliance is voluntary and applies only to firms that manage assets. Service providers like software developers may endorse GIPS but cannot claim compliance. Compliance must be firmwide; partial compliance for specific products is not permitted.

Key Points

GIPS ensures comparability and prevents misleading performance reporting.
Practices like survivorship bias and cherry-picking are prohibited.
Compliance is voluntary and must be firmwide.
Only firms managing assets can claim compliance; others may only endorse.
GIPS benefits clients by providing reliable data for comparison.

Key Definitions: Firm, Composite, and Discretion5 min

A 'firm' is the distinct business entity held out to clients, which may include various geographic locations. A 'composite' is a group of individual discretionary portfolios with a similar strategy or objective. Inclusion in a composite is determined ex ante (before performance is known) to prevent bias. All fee-paying, discretionary portfolios must be included in at least one composite. 'Discretion' is defined by the firm and refers to the ability to implement a strategy without significant client-imposed restrictions. Composite returns are calculated as an asset-weighted average of the underlying portfolios.

Key Points

A 'firm' is the entity held out to clients.
A 'composite' aggregates discretionary portfolios with similar strategies.
All fee-paying discretionary portfolios must be included in a composite.
Composite returns are asset-weighted, not simple averages.
Discretion refers to the absence of significant client restrictions.

The Eight Sections of GIPS Standards4 min

The GIPS standards are organized into eight sections. Section 1, Fundamentals of Compliance, covers defining the firm and providing compliant reports. Section 2, Input Data and Calculation Methodology, ensures consistency in data. Section 3 covers Composite and Pooled Fund Maintenance. Sections 4 through 7 detail the specific reporting requirements for Time-Weighted and Money-Weighted returns for composites and pooled funds. Finally, Section 8 outlines the GIPS Advertising Guidelines for firms claiming compliance in advertisements.

Key Points

Section 1: Fundamentals of Compliance.
Section 2: Input Data and Calculation Methodology.
Section 3: Composite and Pooled Fund Maintenance.
Sections 4-7: Reporting requirements for different return types.
Section 8: GIPS Advertising Guidelines.

Verification4 min

Independent verification is recommended but not mandatory. It must be performed by a third party on a firmwide basis. The verifier attests that the firm has complied with composite construction requirements firmwide and has established proper policies and procedures for GIPS compliance. Verification does not validate the accuracy of a specific composite's performance presentation but focuses on the firm's methodologies and processes.

Key Points

Verification is voluntary and performed by a third party.
It must be performed on a firmwide basis, not for specific composites.
Verifiers attest to composite construction and compliance processes.
Verification provides additional credibility to the firm's claim of compliance.

Questions

Question 1

Which of the following parties is eligible to claim compliance with the Global Investment Performance Standards (GIPS)?

Reading 59: Introduction to the Global Investment Performance Standards (GIPS)

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