SS18 Global Investment Performance Standards (GIPS) - What you Need to Know for the CFA

I've previously written a post on what GIPS material gets tested on the CFA Level 3 exam. If you haven't checked it out it's a helpful guide on what I think matters, and it will let you skim the GIPS material a lot faster.

(Plus that's where to get the specific equations)

But GIPS can still be a tricky section for folks. Recently a friend posted a helpful summary for how they review the material which I wanted to share (lightly edited).

Before we dive in though, there is one question which can be surprisingly helpful come exam time.

Namely, if you take a step back and ask “what would i want to know as an investor about this performance evaluation” that can help you figure out what should be presented.

The Basics - What global investment performance standards (GIPS) are all about: 

  • GIPS applies to firms, not individuals. An analyst cannot be “GIPS compliant”
  • The goal is fair representation and disclosure across investment opportunities for the public
  • It fosters the notion of “self regulation” within the industry
  • Each section includes “requirements” and “recommendations” for compliance. I would focus on the requirements if time is limited.
  • All actual, fee-paying, discretionary portfolios must be included in at least one composite
  • No non-discretionary portfolios, but non-fee paying portfolios may be included
  • Must calculate time-weighted total portfolio returns with external cash flows using daily weighting
  • Only actual assets, no model portfolios or simulations

The material on disclosures is easily testable along with some of the differences between the real estate and private equity sections.

Mandatory Disclosures under GIPS:

  • If they have met all requirements using the appropriate compliance statement (verbatim!)
  • Definition of the firm and description of composites (with creation date) and benchmarks
  • If they are presenting gross of fees and any fees deducted
  • If presenting net of fees, if model or actual management fees are deducted
  • Currency used in presentation
  • Measure of internal dispersion
  • Fee schedule
  • Use and extent of leverage, derivatives and short positions
  • Date, description and reason for redefinition of firm or composites
  • Minimum asset levels for composites
  • Treatment of withholding taxes, dividends, interest and capital gains
  • Bundled fees and the types of bundled fees
  • Sub-advisors and the period in which they were used
  • Any portfolios that were not valued at month end or last business day
  • Use of subjective unobservable valuation inputs
  • If no benchmark is used and why
  • Custom benchmarks used; description, date of creation, components, weights and rebalancing process
  • Whether the performance of a past firm or affiliation is linked (only appropriate if substantially all decision makers came over to new firm, the process remains substantially the same, and the firm has documentation of the performance history).

Presentation and reporting guidelines under GIPS:

  • Total benchmark return for each period must be presented
  • Composite assets at the end of each year
  • Total firm assets or % of firm assets in each composite
  • Returns of less than one year cannot be annualized
  • % of composite in non-fee paying portfolios
  • % of composite in bundled fee portfolios
  • Five years of GIPS compliant performance or since inception if 5-years not available
  • Firms must add one year each year until at least ten years of data is reported

Be able to calculate the income return and capital return for real estate funds.

GIPS Valuation Hierarchy

Remember the valuation hierarchy for GIPS if the asset’s actual market value is not available. That is, you start with the top and if it isn't an option you keep going down the list. The hierarchy is:

  • prices of similar assets in active markets
  • prices of similar assets in inactive markets
  • observable market inputs other than prices such as dividends, cash flows for pricing models
  • subjective or unobservable inputs like discount rates and projections