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| Performance Verification |
"Investment practices, regulation, performance measurement, and reporting of performance results have historically varied considerably from country to country. Some countries have established performance calculation and presentation guidelines that are domestically accepted, and others have few standards for presenting investment performance. These practices have limited the comparability of performance results between firms in different countries and have hindered the ability of firms to penetrate markets on a global basis. |
CFA Institute (formerly known as the Association for Investment Management and Research or AIMR) recognized the need for a global set of performance presentation standards, and in 1995, it sponsored and funded the Global Investment Performance Standards (GIPS®) Committee to develop a single standard for presenting investment performance" - CFA Institute |
Effective January 1, 2006, the AIMR-PPS® standards were phased out; firms now must comply directly with the Global Investment Performance Standards (GIPS®). What does GIPS compliance mean for AIMR-PPS compliant firms? Here is what you need to know: |
| Disclosure Changes/Updates: |
| The required compliance statement has been shortened: "[Name of Firm] has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®)." |
| One new required sentence of disclosure was added: "Additional information regarding policies for calculating and reporting returns is available upon request." (Make sure before you add this disclosure you can provide the information, if requested.) |
| Other required disclosures were added only if applicable: |
- If a sub-advisor is used, disclose the use and the periods of use.
- If a firm is redefined, disclose the date and reason for redefinition.
- Disclose changes to composite names and definitions, if any.
- If carve-outs are used, disclose the percent of the composite that is comprised of carve-outs (only prospectively).
- Firms can choose to present either percent of firm assets or total firm assets for each year-end rather than both.
- The disclosure for use of leverage/derivates is only required if material. Previously, there was no materiality threshold.
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| Removed Requirements |
- The requirement to accrue for dividends beginning January 1, 2005 is now only a recommendation.
- Firms are no longer required to disclose the percentage of the composite invested in countries/regions not included in the benchmark.
- Disclosure for use of settlement date accounting prior to January 1, 2005, is no longer required.
- If carve-outs are included in a composite, firms do not have to disclose the list of underlying composites.
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| Reconciling the 10-year/5-year Performance Requirement |
- Firms that have been claiming compliance with the AIMR-PPS are required to continue presenting ten years of performance.
- Firms claiming compliance with GIPS, that have not previously claimed compliance with the AIMR-PPS, are required to first present five years of performance history and then add a year until a total of ten years are presented.
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| The "New" Wrap/Separately Managed Account (SMA)/Bundled Fee Guidance |
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A common compliance mistake is for firms to assume they don't have "wrap" accounts because they don't have a contract directly with a wrap sponsor. "Dual contract" arrangements are considered wrap accounts if no transaction fees are being charged to the client when trades are made.
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The revised GIPS includes bundled fee provisions, complemented by the "Wrap Fee/SMA Provisions and Guidance for GIPS," which also goes into effect January 1, 2006. Although new to GIPS, the bundled fee provisions are only slightly modified from the fundamental principles already present in the AIMR-PPS standards since 1995, and listed below for clarification.
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| Key Requirements for Wrap Fee/SMA/Bundled Fee Portfolios |
- Net performance must be presented. No exceptions exist for "one-on-one", "sophisticated" or "prospective sponsor internal-use-only" presentations.
- Net returns must be reduced by the entire bundled fee or the portion of the bundled fee that includes trading expenses and the investment management fee. The use of estimated trading expenses is not permitted.
- "Pure gross" (gross of all fees) performance is still permitted as supplemental information and must always be shown in conjunction with required net-of-fee returns.
- Composites must be defined based on accounts with similar investment objectives. Sponsor-specific composites may be created as supplemental information and must include the name of the sponsor in the composite name.
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Nonwrap/Institutional account performance may be shown for historical performance only until the firm begins managing actual wrap portfolios. The nonwrap performance must be netted down by the highest applicable wrap fee to simulate a wrap performance record.
- The firm must disclose the percentage of composite assets that are bundled fee portfolios in addition to the various types of fees that are included in the bundled fee.
- When calculating/disclosing a measure of dispersion, a firm may choose to treat an aggregate sponsor-level return as a single portfolio.
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Firms will need adequate books and records after January 1, 2006. Many firms are shadowing bundled fee accounts on their own portfolio accounting systems while others continue to place reliance on sponsor records. If books and records/composite maintenance for wrap accounts is just not feasible, firms can continue to claim compliance by excluding wrap accounts from the firm definition and firmwide assets.
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| Verification Firms |
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