Provisions of the GIPS Standards
Deciding to implement GIPS standards is a big decision, and one that comes with a lot of time and effort. You could almost say that it's like a game plan developed for the biggest championship—it takes a lot of study, review, and coordination to implement these new guidelines.
When you think about the GIPS standards and how they apply to performance calculations and reporting, it's best to start by evaluating where the Standards apply and who they apply to. So where's the best place to start implementing GIPS standards?
That leads to a focus on the performance calculation, which hinges directly on proper information. So what's the next provision of the GIPS standards all about?
No.
GIPS standards don't just apply to a specific internal group.
That's not it.
That's later in the process. Right now, you're just establishing the basics.
The Standards also focus on the total sum of manager portfolios so that clients know that the investment mandate, objective, and strategy are similar to their other investment options. What ties these three things together?
That's not it.
GIPS standards don't calculate the benchmark return; they're focused on the portfolio's return.
No.
GIPS standards all about performance calculations, not value at risk.
Along with composite composition, GIPS standards are all about disclosures, which is another provision. In fact, disclosures are a primary part of GIPS compliance because firms are required to disclose certain information and policies. Yet firms aren't required to disclose negative assurances, like telling clients that option trading isn't used in the strategy. Overall, the disclosures amount to one final, big disclosure that gives the client the ultimate assurance. What disclosure indicates the highest GIPS priority?
Not quite.
You're looking for an internal measure, not a broad comparison benchmark.
No.
That's not going to tie multiple portfolios together.
No.
Firms don't know if other firms have taken lower risk.
This doesn't just impact the return calculation and the number of disclosures. It also impacts the presentation and reporting. But even though GIPS standards will have requirements for certain situations, the Standards can't cover all potential issues like changes in industry practices, technology, or products. So what standard should advisers seek to implement when using the GIPS standards?
That's not it.
That's not an appropriate claim, as firms won't know who has the highest performance.
No.
As a fiduciary, advisers have a legal and ethical duty to clients.
That's not it.
Sometimes the maximum GIPS level doesn't cover all situations.
That's right!
There may be times where the GIPS standards don't cover the necessary ethical behavior in disclosing all relevant information. That's why GIPS represent the baseline standard, not the ultimate standard.
__GIPS advertising Guidelines__ is a final provision on the list that has been discussed in the past. Not only do you need to be careful about what you present and how, but then advertised claims of compliance and performance must be with a few things in mind.
It's also important for the firm to define how a portfolio will be included in the composite. So what else do you think is required?
That's not it.
That's easy to define and doesn't impact the composite.
No.
That's pretty straightforward to understand and doesn't involve the composite.
But input data is only part of the return focus. What else must GIPS standards focus on to ensure that returns are comparable?
No.
The holdings inside the portfolio can vary between different managers.
That's not it.
Similar management strategies will have different levels of risk.
So composite construction develops the composite return. What do you think is the measurement of that composite return?
No.
The asset manager's strategy can be implemented at different times, so you'd want a broader range of performance results.
Not quite.
Some portfolios will have a greater ability to implement the manager's strategy, so an average won't capture that impact.
To sum it up:
[[summary]]
That's right!
GIPS standards start with __fundamentals of compliance__, which includes defining the firm because they apply at the firm-wide level. For companies with many divisions and various business lines, this can be an important question because it creates firm-wide boundaries where total firm assets are then determined.
Yes!
The firm will also need to define its definition of discretion or the ability of the firm to implement its investment strategy, because it establishes which portfolios must be included in the composite. So the first provision in the GIPS standards relates to defining the firm and discretion.
Indeed.
One of the main provisions within the GIPS standards focuses on what goes into calculation investment performance, and you probably understand why. That data drives the return calculation and establishes the base for the presentations that clients receive.
That's right!
GIPS standards include __input data and calculation methodology__ to ensure that the calculation methodology remains consistent between various firms so that clients can compare results. So it's important to note the provision on calculation methodology.
Exactly!
GIPS includes __composite and pooled fund maintenance__ provisions. Composites are constructed so that they capture all the fee-paying discretionary portfolios into various groupings. This way, the client can evaluate a strategy over multiple asset managers.
Right you are!
The return needs to be the asset-weighted average of the performance of all portfolios within the composite so that all portfolios within the strategy are captured. From there, GIPS requires both a __composite time-weighted return report__ and a __composite money-weighted return report__. With the 2020 edition, GIPS also requires a __pooled fund time-weighted return report__ and a __pooled fund money-weighted return report__.
Exactly!
All disclosures are important, but if a firm claims compliance, then many of those disclosures are required. So the claim of compliance is the biggest disclosure in the GIPS standards because it brings the level of responsibility and requirements to the next step.
By defining the firm
By defining the specific internal reporting group
By building out composites for each specific strategy
The proper input data
The benchmark return
The portfolio's value at risk
The composite
The benchmark
The individual sector weightings
The claim of lowest risk
The claim of compliance
The claim of highest returns
Minimum GIPS standards
Maximum GIPS standards
GIPS standards with high personal ethical standards
The definition of a client
The definition of a portfolio
The definition of discretion
The calculation methodology
The holdings inside the portfolio
The level of risk within the portfolio
The average of all the portfolios within the composite
The median portfolio return of all the portfolios in the composite
The asset-weighted average of the performance of all portfolios within the composite
Continue
