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"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:
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If a
sub-advisor is used, disclose the use and the periods of use.
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If a
firm is redefined, disclose the date and reason for redefinition.
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Disclose changes to composite names and definitions, if any.
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If
carve-outs are used, disclose the percent of the composite that is comprised of
carve-outs (only prospectively).
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Firms can choose to
present either percent of firm assets or total firm assets for
each year-end rather than both.
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The disclosure for
use of leverage/derivates is only required if material. Previously, there
was no materiality threshold.
Removed
Requirements
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The
requirement to accrue for dividends beginning January 1, 2005 is now only a
recommendation.
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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.
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If
carve-outs are included in a composite, firms do not have to disclose the list
of underlying composites.
Reconciling the
10-year/5-year Performance Requirement
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Firms
that have been claiming compliance with the AIMR-PPS are required to continue
presenting ten years of performance.
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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.
The “New”
Wrap/Separately Managed Account (SMA)/Bundled Fee Guidance
-
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.
-
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.
Key Requirements
for Wrap Fee/SMA/Bundled Fee Portfolios
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Net performance must be presented. No exceptions exist for “one-on-one”,
“sophisticated” or “prospective sponsor internal-use-only” presentations.
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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.
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“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.
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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.
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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.
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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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