GIPS Presentation and Reporting Requirements

GIPS standards can feel burdensome and very detailed, so it's important to remember their ultimate goals, especially when it comes to presentation and reporting. What's the ultimate goal of presentation and reporting?

No. GIPS standards aren't in place to help win new business.

Why would GIPS standards require a measure of internal dispersion to be included in presentations and reports?

Not really. Utilizing GIPS standards is an ethical approach, not a marketing approach.

Not quite. It doesn't measure strategy risk; it focuses on implementation.

No. It's a range of individual portfolio returns, not a measure of time.

That's exactly right. The internal dispersion shows the range of returns for individual portfolios within a strategy so that clients can evaluate how the manager implemented the strategy across portfolios. They can then discover whether the composite is too broad or new money impacted implementation. GIPS standards offer firms several methods of presenting the internal dispersion. The simplest way is to show the highest and lowest returns of individual portfolios for a given strategy, but that can have some drawbacks for the asset manager and client, particularly in periods when the manager hasn't invested the portfolio fully. Why is this internal dispersion measure not the best choice?

The highest and lowest returns won't capture the full range of returns because one of them could be an outlier. So clients won't have a proper set of expectations. That's why GIPS also allows firms to use the standard deviation. The standard deviation for internal dispersion of an equally weighted portfolio is $$\displaystyle S_c = \sqrt{\frac{\sum^{n}_{t=1} (r_i - \overline{r}_c)^2}{n}}$$, where _r__{_i_} is the return of each individual portfolio, $$\overline{r}_c$$ is the equal-weighted mean or arithmetic mean return to the portfolio in the composite, and _n_ is the number of portfolios in the composite. Given most clients' basic knowledge of math, why would the standard deviation work well as an internal dispersion measure?

That's not it. It's only the highest and the lowest returns, so it's not going to capture all the other returns in the composite.

Right!

Not really. It's actually best used for _normal_ distributions.

GIPS standards are built on comparability for clients across firms, so they require that for periods on or after 1 January 2011, firms present, as of each annual period end, the three-year annualized _ex post_ standard deviation, using monthly returns, for the composite and benchmark. This will allow clients to compare risk across firms. For some firms that are just starting out, this provision can be difficult, and there's a natural question of __portability__ of returns, or whether past performance at other firms can be used. In these cases, GIPS standards have conditions where past performance must be linked (meaning that there's no choice) on a composite-specific basis.

Given the available options, GIPS standards still allow firms to choose their own method for measuring internal dispersion. The only requirement is that it's presented accurately, measured consistently, and shows a range of returns for each annual period. What seems to be missing here?

No, this sounds very flexible for firms.

Yes!

Not really; any dispersion measure is essentially serving as a risk measure.

First, basically all the decision makers of the past performance are employed by the new or acquiring firm. Second, the decision-making process basically remains the same. And third, the new or acquiring firm has records that document and support the reported performance. With these conditions, why would GIPS standards require firms to present performance?

Well, no. If a manager starts a new strategy, then that's a different decision-making process.

Exactly. GIPS standards don't encourage managers underperforming and then simply opening a new firm with the same strategy and people. So past performance must be presented if the firm retains the same decision makers and approach. Performance can also contain non-fee-paying discretionary accounts, just as long as the firm presents, at the end of each period, the percentage of composite assets represented by the non-fee-paying portfolios. Similarly, if the composite contains bundled fees, the firm must present, at the end of each period, the percentage of composite assets that are bundled-fee portfolios.

No, that's not it. A new research staff indicates a different investment approach.

To sum it up: [[summary]]

Yes.

Standard deviation is a good way to communicate internal dispersion to clients because it's a simple, commonly used statistic. But that equation assumed equal weighting. If your firm prefers to use asset-weighted standard deviation, then the standard deviation of individual portfolios within the composite is $$\displaystyle S_{Caw} = \sqrt{\sum^{n}_{i=1} \left[ (r_i - \overline{r}_{proxy})^2 \times w_i \right] }$$, where $$\displaystyle \overline{r}_{proxy}$$ is the asset-weighted mean return of portfolios 1 through _n_ found by $$\displaystyle \overline{r}_{proxy} = \sum^{n}_{i=1} (w_i \times r_i)$$, and _w__{_i_} is the weight of portfolio _i_.

Clearly, yes. GIPS standards are all about fair representation and full disclosure, and this ultimately helps clients compare and understand a prospective presentation and a client report. The two types of GIPS Reports are GIPS Composite Reports and GIPS Pooled Fund Report. GIPS standards require five years of annual performance along with composite and benchmark _total return_ performance included annually, the number of portfolios (if six or more), the amount of assets within the composite, the percentage of the firm's total assets within the composite or the amount of total firm assets at the end of each period, and a measure of internal dispersion of the individual portfolio returns.

Winning new client business

Having fair representation and full disclosure

Getting the best presentation and reporting results

It shows investors how risky the strategy is

It shows investors how long it took managers to implement the strategy in new portfolios

It shows investors how consistently the firm implemented strategy across individual portfolios.

It may not capture the actual distribution of returns

It may show an average of the overall composite returns

It is a familiar statistic for many clients

It can be used for irregular distributions

Flexibility

Comparability

Risk measurement

So managers that start new strategies have historical performance

So managers can't open a similar firm without reporting bad performance

So a manager can jump to a new firm with a new supporting research department

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