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LM5 Overview of the Global Investment Performance Standards 2024 Level III Notes © IFT. All rights reserved 1 LM5 Overview of the Global Investment Performance Standards 1. Objective and Scope of the GIPS Standards............................................................................................3 Objective and Scope of the GIPS Standards...........................................................................................3 2. Fundamentals of Compliance ......................................................................................................................7 Definition of the Firm.................................................................................................................................. 13 Definition of Discretion.............................................................................................................................. 13 Other Fundamentals of Compliance...................................................................................................... 14 3. Time-Weighted Return ............................................................................................................................... 14 Time-Weighted Return............................................................................................................................... 19 4. Miscellaneous Return Calculation Topics ............................................................................................ 23 Annualizing Returns.................................................................................................................................... 23 Treatment of Cash Equivalents............................................................................................................... 23 Treatment of Expenses and Fees............................................................................................................ 23 Valuation Requirements............................................................................................................................ 24 5. Composite Time-Weighted Return Calculations............................................................................... 24 Composite Time-Weighted Return Calculations.............................................................................. 25 6. Composites—Qualifying Portfolios and Defining Investment Strategies................................ 27 Composites—Defining Investment Strategies .................................................................................. 28 7. Composites—Including And Excluding Portfolios ........................................................................... 29 8. Presentation and Reporting Requirements for Composites......................................................... 29 Minimum Years of Performance............................................................................................................. 32 Required Elements of a GIPS Composite Report.............................................................................. 32 Portability........................................................................................................................................................ 33 Sample Reports ............................................................................................................................................. 33 9. Verification ...................................................................................................................................................... 35 Scope of Verification.................................................................................................................................... 36 Verification Process..................................................................................................................................... 36 Summary ............................................................................................................................................................... 37 This document should be read in conjunction with the corresponding reading in the 2024 Level III CFA® Program curriculum. Some of the graphs, charts, tables, examples, and figures are copyright
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LM5 Overview of the Global Investment Performance Standards 2024 Level III Notes © IFT. All rights reserved 3 1. Objective and Scope of the GIPS Standards The GIPS standards fulfill the need for a consistent, globally accepted standard for investment management firms in calculating and presenting investment returns to prospective clients and prospective investors. • A prospective client is any person or entity that has expressed interest in one of the firm’s strategies and qualifies to invest in that strategy via a segregated account. • A prospective investor is any person or entity that has expressed interest in one of the firm’s pooled funds and qualifies to invest in the pooled fund. The GIPS standards are based on the ideals of fair representation and full disclosure of an investment management firm’s performance history. A GIPS Report is a specific type of performance presentation that must be provided to prospective clients and investors when a firm claims compliance with the GIPS standards. Instructor’s Note: We recommend reading the GIPS handbook, to better understand this reading. Link: https://www.cfainstitute.org/en/ethics/codes/gips-standards/firms Objective and Scope of the GIPS Standards The Need for Global Investment Performance Standards Unscrupulous employees at investment management firms can misrepresent performance data in several ways. They could: ▪ present returns only for the best-performing portfolios as though those returns were fully representative of the firm’s expertise in a given strategy or style; ▪ base portfolio values on their own unsubstantiated estimates of asset prices; ▪ inflate returns by annualizing partial-period results; ▪ select the most favorable measurement period, calculating returns from a low point to a high point; ▪ present simulated returns as though they had actually been earned; ▪ choose as a benchmark the particular index the selected portfolios have outperformed by the greatest margin during the preferred measurement period; ▪ portray the growth of assets in the style or strategy of interest to mask the difference between investment returns and client contributions; or ▪ use the marketing department’s expertise in graphic design to underplay unfavorable performance data and direct the prospect’s attention to the most persuasive elements of the sales presentation. The GIPS standards ensure that the firm’s performance history is fairly represented and adequately disclosed. They benefit both clients as well as investment management firms.
LM5 Overview of the Global Investment Performance Standards 2024 Level III Notes © IFT. All rights reserved 4 Client/Prospective Client Benefit Investments Firm Benefits Well established, well formulated and consistent standard makes it easier to compare and evaluate investment firms GIPS benefits investment management industry as a whole Greater confidence that performance data is fairly presented Widespread adherence to GIPS standards helps build the industry’s credibility In some markets clients/fund sponsors look for GIPS-compliant investment management firms GIPS implementation might enable improvement of internal processes and strengthen managerial controls Note that GIPS compliance does not exempt prospective clients from thorough due diligence. The Scope of the GIPS Standards for Firms Only investment management firms and asset owners who manage assets on a discretionary basis and compete for business may claim compliance with the GIPS Standards for Firms. Consultants, software houses, and third-party performance measurement providers such as custodians are not permitted to claim GIPS compliance. GIPS compliance can only be claimed on a firm-wide basis. Compliance cannot be claimed for a subset of an investment firm's products, nor specific composites, pooled funds, or portfolios. Instructor’s Note: • A composite is an aggregation of one or more portfolios that are managed according to a similar investment mandate, objective, or strategy. • A segregated account is a portfolio owned by a single client, sometimes referred to in practice as a separately managed account (SMA). • A pooled fund is also a "portfolio," but in this reading, we distinguish between a segregated account portfolio and a pooled fund portfolio because the GIPS standards for pooled funds may differ from those for segregated accounts. • Pooled funds are further classified into (1) A broad distribution pooled fund that is available for investment to the general public, e.g. mutual funds (2) A limited distribution pooled fund – any pooled fund that is not a broad distribution fund, e.g. private equity and hedge funds. This reading is based on the 2020 edition of the GIPS standards, which are effective as of 1 January 2020. GIPS Reports that include performance for periods ending on or after 31st December 2020 must be prepared in accordance with the 2020 edition of the GIPS standards.