GLOBAL INVESTMENT PERFORMANCE STANDARDS

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GLOBAL INVESTMENT PERFORMANCE STANDARDS

  1. 1. GLOBAL As adopted by the INVESTMENT AIMR ® Board of Governors PERFORMANCE STANDARDS ™ April 1999 ASSOCIATION FOR INVESTMENT PO Box 3668 MANAGEMENT AND RESEARCH® Charlottesville, VA 22903-0668 USA Tel: 804-951-5499 • Fax: 804-951-5320 E-mail: GIPS-Info@aimr.org Setting a Higher Standard for Internet: www.aimr.org Investment Professionals Worldwide™
  2. 2. CFA®, Chartered Financial Analyst™, AIMR-PPS™, and GIPS™ are just a few of the trademarks owned by the Association for Investment Management and Research. To view a list of the Association for Investment Management and Research’s trademarks and a Guide for the Use of AIMR’s Marks, please visit our Web site at www.aimr.org.
  3. 3. GLOBAL PERFORMANCE PRESENTATION STANDARDS SUBCOMMITTEE Lee N. Price, CFA, Chair Dresdner RCM Global Investors Australia The Netherlands Jonathan P. Buckeridge Ad J.C. van den Ouweland RBA Morgan Stanley Dean Witter Investment PGGM Management New Zealand Brazil Louis Boulanger, CFA Elaine Guimaraes Restier Goncalves William M. Mercer Limited ABAMEC-Nacional South Africa Chile Lesley Harvey Pedro B. Corona Southern Asset Management Asociacion Gremial de Administradores de Fondos de Pensiones Switzerland Thomas Vock, CFA Denmark Zurich Financial Services Bo Knudsen Carnegie Capital Asset Management Co. Thailand Teera Phutrakul EFFAS Permanent Commission on Thai Capital Management Co., Ltd. Performance Measurement Dugald M. Eadie (Chairman) UK Henderson Investors Carl R. Bacon Foreign & Colonial Management Ltd. David M. MacKendrick (Vice Chairman) EFFAS John C. Stannard, CFA Frank Russell Company Germany Ralf E. Bendheim The United States DIT Deutscher Investment - Trust James E. Hollis, III, CFA Standish, Ayer & Wood, Inc. Hong Kong Iain W. McAra George W. Long, CFA J.P. Morgan Investment Management Inc. Long Investment Management Ltd. Neil E. Riddles, CFA Japan Templeton Global Investors, Inc. Yoh Kuwabara R. Charles Tschampion, CFA J.P. Morgan Trust Bank Ltd. General Motors Investment Management Corp. Malaysia Arnold B.L. Lim, CFA AIMR Staff Malaysian Society of Financial Analysts Michael S. Caccese, Esq. HLG Asset Management Sdn Bhd Jonathan J. Stokes, Esq. NAPF Philip Lambert Unilever plc ©1999 Association for Investment Management and Research
  4. 4. The GIPS Committee gratefully acknowledges the contributions of the following participants: Austria Luxembourg Michael Shmid Laurence Jodogne Belgium The Netherlands Philippe Gregoire Joost Klijberg Denmark Norway Neils-Ulrik Mousten Jens-Morten Wembstad Finland Poland Timo Loyttyniemi Wolfgang Bauer France Portugal Alain Ernewein Ricardo Rio Germany Spain Jörg Lilla Santiago de Rivera Hungary Sweden Peter Holtzer Erik Sjoberg Ireland Switzerland Ronan Smith Christof Kutscher Italy Daniele Fano ©1999 Association for Investment Management and Research
  5. 5. GLOBAL INVESTMENT PERFORMANCE STANDARDS Outline I. INTRODUCTION Preamble: Why Is a Global Standard Needed? Vision Statement Objectives Overview Scope Compliance Relationship of GIPS with Country-Specific Laws, Regulations, and Industry Standards II. CONTENT OF THE GLOBAL INVESTMENT PERFORMANCE STANDARDS Input Data Calculation Methodology Composite Construction Disclosures Presentation and Reporting III. VERIFICATION A. Scope and Purpose of Verification B. Required Verification Procedures C. Detailed Examinations of Investment Performance Presentations APPENDIX A: SAMPLE PRESENTATION ©1999 Association for Investment Management and Research 1
  6. 6. GLOBAL INVESTMENT PERFORMANCE STANDARDS I. INTRODUCTION PREAMBLE: WHY IS A GLOBAL STANDARD VISION STATEMENT NEEDED? 5. A global investment performance standard leads to 1. The financial markets and the investment man- readily accepted presentations of investment perfor- agement industry are becoming increasingly mance that (1) present performance results that are global in nature. Given the variety of financial readily comparable among investment managers, entities and countries involved, this globaliza- without regard to geographic location, and (2) facil- tion of the investment process and the expo- itate a dialogue between investment managers and nential growth of assets under management their prospective clients about the critical issues of demonstrate the need to standardize the calcu- how the manager achieved performance results and lation and presentation of investment perfor- future investment strategies. mance. 2. Prospective clients and asset managers will OBJECTIVES benefit from an established standard for in- 6. To obtain worldwide acceptance of a standard vestment performance measurement and pre- for the calculation and presentation of invest- sentation that is recognized worldwide. ment performance in a fair, comparable format Investment practices, regulation, performance that provides full disclosure. measurement, and reporting of performance 7. To ensure accurate and consistent investment results vary considerably from country to performance data for reporting, record keep- country. Some countries have guidelines that ing, marketing, and presentation. are widely accepted within their borders, and others have few recognized standards for pre- 8. To promote fair, global competition among senting investment performance. investment firms for all markets without creat- ing barriers to entry for new firms. 3. Requiring investment managers to adhere to performance presentation standards will help 9. To foster the notion of industry self-regulation assure investors that the performance informa- on a global basis. tion is both complete and fairly presented. Firms in countries with minimal presentation OVERVIEW standards will be able to compete for business 10. The Global Investment Performance Standards on an equal footing with firms from countries (GIPS) have several key characteristics: that have more developed standards. Firms a. GIPS are ethical standards for investment from countries with established practices will performance presentation to ensure fair have more confidence of being fairly compared representation and full disclosure of an in- to “local” firms when competing for business vestment firm’s performance history. in countries that have not previously adopted performance standards. b. GIPS exist as a minimum worldwide stan- dard where local or country-specific law, 4. Both prospective and existing clients of invest- regulation, or industry standards may not ment firms will benefit from a global invest- exist for investment performance measure- ment performance standard by having a ment and/or presentation. greater degree of confidence in the perfor- mance numbers presented by the firms. Perfor- c. GIPS require managers to include all actual mance standards that are accepted in all fee-paying discretionary portfolios in com- countries enable all investment firms to mea- posites defined according to similar strate- sure and present their investment performance gy and/or investment objective and require so that clients can readily compare investment firms to show GIPS compliant history for a performance among firms. minimum of five years, or since inception 2 ©1999 Association for Investment Management and Research
  7. 7. of the firm or composite if in existence less SCOPE than five years. 11. Application of GIPS. Investment management d. GIPS require firms to use certain calcula- firms from any country may come into compli- tion and presentation methods and to make ance with GIPS. Compliance with GIPS will certain disclosures along with the perfor- facilitate a firm’s participation in the invest- mance record. ment management industry on a global level. e. GIPS rely on the integrity of input data. The 12. Definition of a Firm. GIPS must be applied on a accuracy of input data is critical to the ac- firmwide basis. A firm may define itself as curacy of the performance presentation. a. an entity registered with the appropriate For example, benchmarks and composites national regulatory authority overseeing should be created/selected on an ex ante the entity’s investment management activ- basis, not after the fact. ities; or f. GIPS consist of guidelines that firms are b. an investment firm, subsidiary, or division required to follow in order to claim compli- held out to clients or potential clients as a ance. The adoption of other elements of distinct business unit (e.g., a subsidiary GIPS is recommended for firms to achieve firm or distinct business unit managing pri- best practice in performance presentation. vate client assets may claim compliance for itself without its parent organization being g. GIPS apply to the presentation of invest- in compliance); ment performance of assets managed on behalf of a third party. c. (until January 1, 2005), all assets managed to one or more base currencies (for firms h. GIPS should be applied with the goal of full managing global assets). disclosure and fair representation of invest- When presenting investment performance in ment performance. Meeting the objective of compliance with GIPS, an investment man- full and fair disclosure is likely to require agement firm must state how it defines itself more than compliance with the minimum as a “firm.” requirements of GIPS. If an investment firm applies GIPS in a performance situation 13. Historical Performance Record. that is not addressed specifically by the a. A firm is required to present, at a mini- Standards or is open to interpretation, dis- mum, five years of annual investment per- closures other than those required by GIPS formance that is compliant with GIPS. If may be necessary. To fully explain the per- the firm or composite has been in existence formance included in a presentation, firms less than five years, firms must present per- are encouraged to present all relevant sup- formance since the inception of the firm or composite. plemental information. b. After a firm presents five years of compli- i. In cases in which applicable local or coun- ant history, firms must present additional try-specific law or regulation conflicts with annual performance up to ten years. For GIPS, the Standards require firms to com- example, after a firm presents five years of ply with the local law or regulation and compliant history, the firm must add an make full disclosure of the conflict. additional year of performance each year j. GIPS do not address every aspect of perfor- so that after five years of claiming compli- mance measurement, valuation, attribu- ance, the firm presents a ten year perfor- tion, or coverage of all asset classes. GIPS mance record. will evolve over time to address additional c. A firm may link a non-GIPS-compliant per- aspects of investment performance. Cer- formance record to their compliant history tain recommended elements in GIPS may so long as no non-compliant performance become requirements in the future. is presented for periods after January 1, ©1999 Association for Investment Management and Research 3
  8. 8. 2000, and the firm discloses the periods of 16. Third-Party Performance Measurement and Com- non-compliance and explains how the pre- posite Construction. GIPS recognize the role of sentation is not in compliance with GIPS. independent third-party performance measur- Nothing in this section shall prevent firms ers and the value they can add to the firm's from immediately presenting more than five performance-measurement activities. Where years of performance results. third-party performance measurement is an established practice or is available, firms are COMPLIANCE encouraged to use this service as it applies to 14. Requirements. Firms must meet all the require- the investment firm. Similarly, where the prac- ments set forth in GIPS to claim compliance tice is to allow third parties to construct com- with GIPS. Although GIPS requirements must posites for investment firms, firms can use be met immediately by a firm claiming compli- such composites in a GIPS-compliant presen- ance, the following requirements do not go into tation only if the composites comply with effect until a future date: GIPS. a. Portfolios must be valued at least monthly 17. Claim of Compliance. Once a firm has met all of for periods beginning January 1, 2001. the required elements of GIPS, the firm may use the following “Compliance Statement” to b. Time-weighted rates of return adjusted for indicate that the performance presentation is cash flows are required. Firms must use in compliance with GIPS: time-weighted rates of return adjusted for daily-weighted cash flows for periods begin- [Insert name of firm] has prepared and ning January 1, 2005. presented this report in compliance with the Global Investment Performance Stan- c. For periods beginning January 1, 2010, dards (GIPS). firms will likely be required to value port- folios on the date of any external cash flow. If the performance presentation does not meet all of the requirements of GIPS, firms cannot d. Firms must use trade-date accounting for represent that the performance presentation is periods beginning January 1, 2005. “in compliance with the Global Investment e. Accrual accounting must be used for divi- Performance Standard except for . . .” State- dends (as of the ex dividend date) for peri- ments referring to the calculation methodol- ods beginning January 1, 2005. ogy used in a presentation as being “in Until these future requirements become effec- accordance (or compliance) with the Global tive, these provisions should be considered Investment Performance Standards” are pro- recommendations. Firms are encouraged to hibited except when applied to the perfor- implement these requirements prior to their mance of a single, existing client. effective date. To ease compliance with GIPS 18. Sample Presentation. A sample presentation, when the future requirements take effect, firms shown in Appendix A, provides an example of should design performance software to incor- what a compliant performance presentation porate these future requirements. could look like, including disclosures. 15. Compliance Check. Firms must take all steps RELATIONSHIP OF GIPS WITH COUNTRY- necessary to ensure that they have satisfied all SPECIFIC LAWS, REGULATIONS, AND of the requirements of GIPS before claiming INDUSTRY STANDARDS compliance with GIPS. Firms are strongly en- couraged to perform periodic internal compli- 19. GIPS fill the void where no country standards ance checks and implement adequate business exist. Regulators and investment organiza- controls on all stages of the investment perfor- tions worldwide are strongly encouraged to mance process—from data input to presenta- recognize and adopt GIPS as the performance tion material—to ensure the validity of presentation standard applicable to their con- compliance claims. stituencies. If there is a need for country- 4 ©1999 Association for Investment Management and Research
  9. 9. specific guidelines that go beyond GIPS, regu- must disclose any local laws and regulations lators and organizations are encouraged to de- that conflict with GIPS. velop and implement such guidelines to 21. The establishment of GIPS will minimize the augment, but not conflict with, GIPS. Regula- complexities that result with the existing con- tors are urged to supervise country compliance tingent reciprocity agreements among organi- with GIPS and any country-specific standards zations with their own standards. that may exist. Organizations are encouraged to recognize 20. Where existing laws, regulations, or industry GIPS rather than establish “country-to- standards already impose performance pre- country” reciprocity agreements for country- sentation standards, firms are strongly encour- specific standards. When a country or group aged to comply with GIPS in addition to those establishes local performance presentation local requirements. Compliance with applica- standards, such standards should incorporate ble law or regulation does not necessarily lead all of the required elements of the GIPS and to compliance with GIPS. When complying state that compliance with GIPS is equivalent with GIPS and local law or regulation, firms to compliance with the local standards. ©1999 Association for Investment Management and Research 5
  10. 10. II. THE GLOBAL INVESTMENT PERFORMANCE STANDARDS GIPS is divided into five sections that reflect the tion about their performance presentation and basic elements involved in presenting perfor- the calculation methodology adopted by the mance information: Input Data, Calculation Meth- firm. Although some disclosures are required odology, Composite Construction, Disclosures, of all firms, others are specific to certain circum- and Presentation and Reporting. stances and thus may not be applicable in all 1. Input Data: Consistency of input data is critical situations. to effective compliance with GIPS and estab- 5. Presentation and Reporting: After constructing lishes the foundation for full, fair, and compa- the composites, gathering the input data, cal- rable investment performance presentations. culating returns, and determining the neces- The Standards provide the blueprint for a firm sary disclosures, the firm must incorporate this to follow in constructing this foundation. information in presentations based on the 2. Calculation Methodology: Achieving compara- guidelines set out in GIPS for presenting the bility among investment management firms’ investment performance results. No finite set performance presentations requires unifor- of guidelines can cover all potential situations mity in methods used to calculate returns. The or anticipate future developments in invest- Standards mandate the use of certain calcula- ment industry structure, technology, products, tion methodologies (e.g., performance must be or practices. When appropriate, firms have the calculated using a time-weighted total-rate-of- responsibility to include in GIPS-compliant return method). presentations information not covered by the 3. Composite Construction: A composite is an Standards. aggregation of a number of portfolios into a sin- The Standards for each section are divided gle group that represents a particular invest- between requirements, listed first in each section, ment objective or strategy. The composite and recommended guidelines. Firms must follow return is the asset-weighted average of the per- the required elements of GIPS to claim compliance formance results of all the portfolios in the com- with GIPS. Firms are strongly encouraged to posite. Creating meaningful, asset-weighted composites is critical to the fair presentation, adopt and implement the recommendations to consistency, and comparability of results over ensure that the firm fully adheres to the spirit and time and among firms. intent of GIPS. An example of a GIPS-compliant presentation for a single composite is included in 4. Disclosures: Disclosures allow firms to elabo- Appendix A. rate on the raw numbers provided in the pre- sentation and give the end user of the Although GIPS may be translated into many lan- presentation the proper context in which to un- guages, if a discrepancy arises between the differ- derstand the performance results. To comply ent versions of the standards, the English version with GIPS, firms must disclose certain informa- of GIPS is controlling. 6 ©1999 Association for Investment Management and Research
  11. 11. 1. Input Data 2.A.4. Composites must be asset weighted 1.A. Requirements using beginning-of-period weightings or another method that reflects both 1.A.1. All data and information necessary to beginning market value and cash support a firm’s performance presen- flows. tation and to perform the required cal- culations must be captured and 2.A.5. Returns from cash and cash equiva- maintained. lents held in portfolios must be in- cluded in total-return calculations. 1.A.2. Portfolio valuations must be based on 2.A.6. Performance must be calculated after market values (not cost basis or book the deduction of all trading expenses. values). 2.A.7. If a firm sets a minimum asset level for 1.A.3. Portfolios must be valued at least portfolios to be included in a compos- quarterly. For periods beginning Jan- ite, no portfolios below that asset level uary 1, 2001, portfolios must be val- can be included in the composite. ued at least monthly. For periods beginning January 1, 2010, it is antici- 2.B. Recommendations pated that firms will be required to 2.B.1. Returns should be calculated net of value portfolios on the date of any ex- non-reclaimable withholding taxes on ternal cash flow. dividends, interest, and capital gains. 1.A.4. Firms must use trade-date accounting Reclaimable withholding taxes should for periods beginning January 1, 2005. be accrued. 1.A.5. Accrual accounting must be used for 2.B.2. Performance adjustments for external fixed-income securities and all other cash flows should be treated in a con- assets that accrue interest income. sistent manner. Significant cash flows (i.e., 10 percent of the portfolio or 1.A.6. Accrual accounting must be used for greater) that distort performance (i.e., dividends (as of the ex dividend date) plus or minus 0.2 percent for the peri- for periods beginning January 1, 2005. od) may require portfolio revaluation 1.B. Recommendations on the date of the cash flow (or after investment) and the geometric linking 1.B.1. Sources of exchange rates should be of subperiods. Actual valuations at the same for the composite and the the time of external cash flows will benchmark. likely be required for periods begin- ning January 1, 2010. 2. Calculation Methodology 2.A. Requirements 3. Composite Construction 2.A.1. Total return, including realized and 3.A. Requirements unrealized gains plus income, must be 3.A.1. All actual fee-paying discretionary used. portfolios must be included in at least 2.A.2. Time-weighted rates of return that ad- one composite. just for cash flows must be used. Peri- 3.A.2. Firm composites must be defined ac- odic returns must be geometrically cording to similar investment objec- linked. Time-weighted rates of return tives and/or strategies. that adjust for daily-weighted cash 3.A.3. Composites must include new port- flows must be used for periods begin- folios on a timely and consistent ning January 1, 2005. Actual valua- basis after the portfolio comes under tions at the time of external cash flows management—unless specifically will likely be required for periods be- mandated by the client. ginning January 1, 2010. 3.A.4. Terminated portfolios must be includ- 2.A.3. In both the numerator and the denom- ed in the historical record of the ap- inator, the market values of fixed-in- propriate composites up to the last come securities must include accrued full measurement period that the income. portfolio was under management. ©1999 Association for Investment Management and Research 7
  12. 12. 3.A.5. Portfolios must not be switched from low which portfolios are not included one composite to another unless doc- in a composite. umented changes in client guidelines 4.A.6. The currency used to express perfor- or the redefinition of the composite mance. make switching appropriate. The his- torical record of the portfolio must re- 4.A.7. The presence, use and, extent of lever- main with the appropriate composite. age or derivatives, including a de- scription of the use, frequency and 3.A.6. Convertible and other hybrid securi- characteristics of the instruments suf- ties must be treated consistently ficient to identify risks. across time and within composites. 4.A.8. Whether performance results are cal- 3.A.7. Carve-out returns excluding cash can- culated gross or net of investment not be used to create a stand-alone management fees and other fees paid composite. When a single asset class by the clients to the firm or to the is carved out of a multiple-asset port- firm’s affiliates. folio and the returns are presented as part of a single-asset composite, cash 4.A.9. Relevant details of the treatment of must be allocated to the carve-out re- withholding tax on dividends, inter- turns and the allocation method must est income, and capital gains. If using be disclosed. Beginning January 1, indexes that are net of taxes, firms 2005, carve-out returns must not be in- must disclose the tax basis of the com- cluded in single asset class composite posite (e.g., Luxembourg based or returns unless the carve-outs are actu- U.S. based) versus that of the bench- ally managed separately with their mark. own cash allocations. 4.A.10. For composites managed against spe- 3.A.8. Composites must include only assets cific benchmarks, the percentage of under management and may not link the composites invested in countries simulated or model portfolios with ac- or regions not included in the bench- tual performance. mark. 4.A.11. Any known inconsistencies between 3.B. Recommendations the chosen source of exchange rates 3.B.1. Separate composites should be creat- and those of the benchmark must be ed to reflect different levels of allowed described and presented. asset exposure. 4.A.12. Whether the firm has included any 3.B.2. Unless the use of hedging is negligi- non-fee-paying portfolios in compos- ble, portfolios that allow the use of ites and the percentage of composite hedging should be included in differ- assets that are non-fee-paying portfo- ent composites from those that do not. lios. 4. Disclosures 4.A.13. Whether the presentation conforms with local laws and regulations that 4.A. Requirements differ from GIPS requirements and The following disclosures are manda- the manner in which the local stan- tory: dards conflict with GIPS. 4.A.1. The definition of "firm" used to deter- mine the firm's total assets and firm- 4.A.14. For any performance presented for wide compliance. periods prior to January 1, 2000, that does not comply with GIPS, the peri- 4.A.2. Total firm assets for each period. od of noncompliance and how the 4.A.3. The availability of a complete list and presentation is not in compliance with description of all of the firm's compos- GIPS. ites. 4.A.15. When a single asset class is carved out 4.A.4. If settlement-date valuation is used by of a multiple-asset portfolio and the the firm. returns are presented as part of a 4.A.5. The minimum asset level, if any, be- single-asset composite, the method 8 ©1999 Association for Investment Management and Research
  13. 13. used to allocate cash to the carve-out (e) The standard Compliance State- returns. ment indicating firmwide compli- ance with GIPS. 4.B. Recommendations (f) The composite creation date. The following disclosures are recom- mended: 5.A.2. Firms may link non-GIPS-compliant performance to their compliant his- 4.B.1. The portfolio valuation sources and tory so long as firms meet the disclo- methods used by the firm. sure requirements of Section 4 and no 4.B.2. The calculation method used by the non-compliant performance is pre- firm. sented for periods after January 1, 4.B.3. When gross-of-fee performance is 2000. (For example, a firm that has presented, the firm’s fee schedule(s) been in existence since 1990 that appropriate to the presentation. wants to present its entire perfor- mance history and claim compliance 4.B.4. When only net-of-fee performance is as of January 1, 2000, must present presented, the average weighted man- performance history that meets the agement and other applicable fees. requirements of GIPS at least from 4.B.5. Any significant events within the firm January 1, 1995, and must meet the (such as ownership or personnel disclosure requirements of Section 4 changes) that would help a prospec- for any non-compliant history prior to tive client interpret the performance January 1, 1995.) record. 5.A.3. Performance for periods of less than 5. Presentation and Reporting one year must not be annualized. 5.A. Requirements 5.A.4. Performance results of a past firm or affiliation can only be linked to or 5.A.1. The following items must be reported: used to represent the historical record (a) At least five years of performance of a new firm or new affiliation if (or a record for the period since (a) a change only in firm ownership firm inception, if inception is less or name occurs, or than five years) that is GIPS com- pliant. After presenting five years (b) the firm has all of the supporting of performance, firms must performance records to calculate present additional annual perfor- the performance, substantially all mance up to 10 years. (For exam- the assets included in the compos- ple, after a firm presents five years ites transfer to the new firm, and of compliant history, the firm the investment decision-making must add an additional year of process remains substantially un- performance each year so that changed. after five years of claiming compli- 5.A.5. If a compliant firm acquires or is ac- ance, the firm presents a 10-year quired by a non-compliant firm, the performance record). firms have one year to bring the non- (b) Annual returns for all years. compliant firm’s acquired assets into compliance. (c) The number of portfolios and amount of assets in the composite 5.A.6. If a composite is formed using single- and the percentage of the firm's asset carve-outs from multiple asset total assets represented by the class composites, the presentation composite at the end of each must include the following: period. (a) a list of the underlying compos- (d) A measure of the dispersion of ites from which the carve-out was individual component portfolio drawn, and returns around the aggregate (b) the percentage of each composite composite return. the carve-out represents. ©1999 Association for Investment Management and Research 9
  14. 14. 5.A.7. The total return for the benchmark (or (a) composite performance gross of benchmarks) that reflects the invest- investment management fees and ment strategy or mandate represented custody fees and before taxes (ex- by the composite must be presented cept for non-reclaimable with- for the same periods for which the holding taxes), composite return is presented. If no benchmark is presented, the presenta- (b) cumulative returns for composite tion must explain why no benchmark and benchmarks for all periods, is disclosed. If the firm changes the (c) equal-weighted means and medi- benchmark that is used for a given an returns for each composite, composite in the performance presen- (d) volatility over time of the aggre- tation, the firm must disclose both the date and the reasons for the change. If gate composite return, and a custom benchmark or combination (e) inconsistencies among portfolios of multiple benchmarks is used, the within a composite in the use of firm must describe the benchmark exchange rates. creation and rebalancing process. 5.B.2. Relevant risk measures—such as vola- 5.B. Recommendations tility, tracking error, beta, modified 5.B.1. The following items should be includ- duration, etc.—should be presented ed in the composite presentation or dis- along with total return for both bench- closed as supplemental information: marks and composites. 10 ©1999 Association for Investment Management and Research
  15. 15. III. VERIFICATION The primary purpose of verification is to establish the claim of compliance and supports the over- that a firm claiming compliance with GIPS has all guiding principles of full disclosure and fair adhered to the standards. Verification will also representation of investment performance. increase the understanding and professionalism of Verification is strongly encouraged and is ex- performance-measurement teams and the consis- pected to become mandatory (but no earlier tency of presentation of performance results. than 2005). Countries may require verification sooner through the establishment of local stan- The verification procedures attempt to strike a dards. balance between ensuring the quality, accuracy, and relevance of performance presentations and 3. The initial minimum period for which verifica- minimizing the cost to investment firms of inde- tion can be performed is one year of a firm’s pendent review of performance results. Invest- presented performance. The recommended ment firms should assess the benefits of improved period over which verification is performed internal processes and procedures, which are as will be that part of the firm’s track record for significant as the marketing advantages of verifi- which GIPS compliance is claimed. cation. 4. A verification report must confirm that The goal of the GIPS committee in drafting the ver- A. the investment firm has complied with all ification procedures is to encourage broad accep- the composite construction requirements tance of verification. of GIPS on a firmwide basis and B. the firm’s processes and procedures are designed to calculate and present A. Scope and Purpose of Verification performance results in compliance with the GIPS standards. 1. Verification is the review of an investment management firm’s performance- Without such a report from the verifier, the firm measurement processes and procedures by an cannot claim that its claim of compliance with GIPS independent third-party “verifier.” Verifica- has been verified. tion tests: 5. After performing the verification, the verifier A. Whether the investment firm has com- may conclude that the firm is not in compliance plied with all the composite construction with GIPS or that the records of the firm cannot requirements of GIPS on a firmwide basis, support a complete verification. In such situa- and tions, the verifier must issue a statement to the B. Whether the firm’s processes and proce- firm clarifying why a verification report was dures are designed to calculate and not possible. present performance results in compliance 6. A principal verifier may accept the work of a with the GIPS standards. local or previous verifier as part of the basis for A single verification report is issued in respect to the principal verifier’s opinion. the whole firm; GIPS verification cannot be carried 7. The minimum GIPS verification procedures out for a single composite. are described in Section III(B), Required Veri- 2. Third-party verification brings credibility to fication Procedures. ©1999 Association for Investment Management and Research 11
  16. 16. B. Required Verification Procedures v. Policy with regard to the accrual of inter- The following are the minimum procedures that est and dividend income. verifiers must follow when verifying an invest- vi. Policy with regard to the market valua- ment firm’s compliance with GIPS. Verifiers must tion of investment securities. follow these procedures prior to issuing a verifica- vii. Method for computing time-weighted tion report to the firm: portfolio return. 1. Pre-verification Procedures viii. Assumptions on the timing of capital inflows/outflows. A. Knowledge of the Firm. Verifiers must obtain ix. Method for computing composite re- selected samples of the firm’s investment per- turns. formance reports, and other available informa- tion regarding the firm, to ensure appropriate x. Policy with regard to the presentation of knowledge of the firm. composite returns. xi. Policies regarding timing of implied tax- B. Knowledge of GIPS. Verifiers must understand es due on income and realized capital the requirements and recommendations of gains for reporting performance on an GIPS, including any updates, reports, or clari- after-tax basis. fications of GIPS published by Investment Per- formance Council, the AIMR sponsored body xii. Policies regarding use of securities/ responsible for oversight of the Global Invest- countries not included in a composite’s ment Performance Standards. benchmark. xiii. Use of leverage and other derivatives. C. Knowledge of the Performance Standards. Verifi- ers must be knowledgeable of country-specific xiv. Any other policies and procedures rele- performance standards, laws, and regulations vant to performance presentation. applicable to the firm and must determine any E. Knowledge of Valuation Basis for Performance Cal- differences between GIPS and the country- culations. Verifiers must ensure that they un- specific standards, laws, and regulations. derstand the methods and policies used to record valuation information for performance D. Knowledge of Firm Policies. Verifiers must deter- calculation purposes. In particular, verifiers mine the firm’s assumptions and policies for must determine that establishing and maintaining compliance with all applicable requirements of GIPS. At mini- i. the firm’s policy on classifying fund mum, verifiers must determine the firm’s fol- flows (e.g., injections, disbursements, lowing policies and procedures of the firm: dividends, interest, fees, taxes, etc. is consistent with the desired results and i. Policy with regard to investment discre- will give rise to accurate returns; tion. The verifier must receive from the firm, in writing, the firm’s definition of ii. the firm’s accounting treatment of income, interest, and dividend receipts is investment discretion and the firm’s consistent with cash account and cash guidelines for determining whether ac- accruals definitions; counts are fully discretionary. iii. the firm’s treatment of taxes, tax reclaims, ii. Policy with regard to the definition of and tax accruals is correct and the manner composites according to investment used is consistent with the desired strategy. The verifier must obtain the method (i.e., gross- or net-of-tax return); firm’s list of composite definitions with iv. the firm’s policies on recognizing pur- written criteria for including accounts in chases, sales, and the opening and clos- each composite; ing of other positions are internally iii. Policy with regard to the timing of inclu- consistent and will produce accurate sion of new accounts in the composites. results; and iv. Policy with regard to timing of exclusion v. the firm’s accounting for investments of closed accounts in the composites. and derivatives is consistent with GIPS. 12 ©1999 Association for Investment Management and Research
  17. 17. 2. Verification Procedures vi. number of years under examination; and A. Definition of the Firm. Verifiers must determine vii. computer applications, software used in that the firm is, and has been, appropriately the construction and maintenance of defined. composites, the use of external perfor- mance measurers, and the calculation of B. Composite Construction. Verifiers must be satis- performance results. fied that This list is not all inclusive and contains only i. the firm has defined and maintained the minimum criteria that should be used in the composites according to reasonable selection and evaluation of a sample for test- guidelines in compliance with GIPS; ing. For example, one potentially useful ii. all of the firm’s actual discretionary fee- approach would be to choose a portfolio for paying portfolios are included in a com- the study sample that has the largest impact posite; on composite performance because of its size iii. the manager’s definition of discretion or because of extremely good or bad perfor- has been consistently applied over time; mance. The lack of explicit record keeping or iv. at all times, all accounts are included in the presence of errors may warrant selecting a their respective composites and no ac- larger sample or applying additional verifica- counts that belong in a particular com- tion procedures. posite have been excluded; E. Account Review. For selected accounts, verifiers v. composite benchmarks are consistent must determine with composite definitions and have i. whether the timing of the initial inclu- been consistently applied over time; sion in the composite is in accordance vi. the firm’s guidelines for creating and with policies of the firm; maintaining composites have been con- ii. whether the timing of exclusion from the sistently applied; and composite is in accordance with policies vii. the firm’s list of composites is complete. of the firm for closed accounts; C. Nondiscretionary Accounts. Verifiers must ob- iii. whether the objectives set forth in the tain a listing of all firm portfolios and deter- account agreement are consistent with the mine on a sampling basis whether the manager’s composite definition as indi- manager’s classification of the account as dis- cated by the account agreement, portfolio cretionary or nondiscretionary is appropriate summary, and composite definition; by referring to the account agreement and the iv. the existence of the accounts by tracing manager’s written guidelines for determining selected accounts from account agree- investment discretion. ments to the composites; D. Sample Account Selection. Verifiers must obtain v. that all portfolios sharing the same a listing of open and closed accounts for all guidelines are included in the same com- composites for the years under examination. posite; and Verifiers may check compliance with GIPS us- ing a selected sample of a firm’s accounts. Ver- vi. that shifts from one composite to another ifiers should consider the following criteria are consistent with the guidelines set when selecting the sample accounts for exam- forth by the specific account agreement ination: or with documented guidelines of the firm’s clients. i. number of composites at the firm; ii. number of portfolios in each composite; F. Performance-Measurement Calculation. Verifiers must determine whether the firm has comput- iii. nature of the composite; ed performance in accordance with the policies iv. total assets under management; and assumptions adopted by the firm and dis- v. internal control structure at the firm (sys- closed in its presentations. In doing so, verifi- tem of checks and balances in place); ers should ©1999 Association for Investment Management and Research 13
  18. 18. i. recalculate rates of return for a sample of C. Detailed Examinations of Investment accounts in the firm using an acceptable Performance Presentations return formula as prescribed by GIPS Separate from a GIPS verification, an investment (i.e., time-weighted rate of return) and management firm may choose to have a further, ii. take a reasonable sample of composite more extensive, specifically focused examination calculations to assure themselves of the (or performance audit) of a specific composite pre- accuracy of the asset weighting of returns, sentation. the geometric linking of returns to pro- duce annual rates of returns, and the cal- Firms cannot make any claim that a particular culation of the dispersion of individual composite has been independently examined with returns around the aggregate composite respect to GIPS unless the verifier has also fol- return. lowed the GIPS verification procedures set forth in G. Disclosures. Verifiers must review a sample of Section B. Firms cannot state that a particular composite presentations to ensure that the pre- composite presentation has been “GIPS verified” sentations include the information and disclo- or make any claim to that effect. GIPS verification sures required by GIPS. relates only to firmwide verification. Firms can make a claim of verification only after a verifier H. Maintenance of Records. The verifier must main- has issued a GIPS verification report. tain sufficient information to support the veri- fication report. The verifier must obtain a To claim verification of a claim of compliance with representation letter from the client firm con- the Standards, a detailed examination of a specific firming major policies and any other specific composite presentation is not required. Examina- representations made to the verifier during the tions of this type are unlikely to become a require- examination. ment of GIPS or become mandatory. 14 ©1999 Association for Investment Management and Research
  19. 19. APPENDIX A. SAMPLE PRESENTATION XYZ Investment Firm Performance Results: Balanced Composite, January 1, 1995, through December 31, 1999 Total Benchmark Number Composite Total Assets at Percentage Total Return Return of Dispersion End of Period of Firm Firm Year (%) (%) Portfolios (%) (DM millions) Assets Assets 1995 16.0 14.1 26 4.5 165 70 236 1996 2.2 1.8 32 2.0 235 68 346 1997 22.4 24.1 38 5.7 344 65 529 1998 7.1 6.0 45 2.8 445 64 695 1999 8.5 8.0 48 3.1 520 62 839 XYZ Investment Firm has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS). Notes: 1. XYZ Investment Firm is a balanced portfolio investment manager that invests solely in German securities. XYZ Investment Firm is defined as an independent investment management firm that is not affiliated with any parent organization. 2. The benchmark: 30 percent DAX 100; 70 percent EFFAS Bund Index rebalanced monthly. Annualized compound composite return = 11.9 percent; annualized compound benchmark return = 11.4 percent. 3. Valuations are computed in German marks and from Reuters. 4. The dispersion of annual returns is measured by the standard deviation across asset-weighted portfolio returns represented within the composite for the full year. 5. Performance results are presented before management and custodial fees but after all trading commissions. The management fee schedule is attached. 6. This composite was created in February, 1995. No alteration of composites as presented here has occurred because of changes in personnel or other reasons at any time. A complete list of firm composites and performance results is available upon request. ©1999 Association for Investment Management and Research 15

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