GIPS: Why Were the GIPS Created?

Several misleading practices used in reporting performance led to the need for the GIPS standards. One of these practices is using representative accounts. What do you think it means?

Incorrect. You are right that this is misleading but this is the definition of survivorship bias, not representative accounts.

Correct. Representative accounts is the misleading practice of selecting a top-performing portfolio to represent the firm’s overall investment results for a specific mandate.

Another misleading practice is presenting an “average” performance history that excludes portfolios whose poor performance was weak enough to result in termination of the firm. What do you think this practice is called?

Incorrect. You should think about what you call something when it remains after all others have failed.

Correct. This practice is misleading by not including all information and specifically only excluding the worst performers which would have changed the results had they been included.

Varying time periods is another misleading practice that presents performance for a time period of excellent returns or when the mandate outperformed its benchmark. If the time period used is disclosed, why do you think this practice is misleading?

Incorrect. Historical information may not always include the most recent time period, but using a consistent time period for all firms is important for comparability.

Correct. Comparing results for different firms if different time periods are used is difficult, if not impossible and is misleading to prospective clients.

In summary, [[summary]]

Incorrect. You are right that this is misleading but this is the definition of varying time periods, not representative accounts.

GIPS standards are a practitioner driven set of ethical principles that establish a standardized, industry-wide approach for investment firms to follow in calculating and presenting their historical investment results to prospective clients. GIPS were created to avoid misleading practices that would make comparability difficult and provide relevant information to prospective clients.

Presenting an “average” performance history that excludes portfolios whose poor performance was weak enough to result in termination of the firm

Selecting a top-performing portfolio to represent the firm’s overall investment results for a specific mandate

Presenting performance for a selected time period during which the mandate produced excellent returns or out-performed its benchmark, making comparison with other firms' results difficult or impossible

Varying time periods

Survivorship bias

It does not include the most recent time period

It makes comparison with other firms’ results difficult or impossible because they may all be for different time periods.

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