Ethics - Global Investment Performance Standards (GIPS)

At first this reading looked really daunting and mainly useless because the bulk of it is just the transcribed actual GIPS written in legalese.

However, much of that portion is 'optional reading.'  So on we go.

12:30 pm

Reading 3 - Global Investment Performance Standards

The candidate should be able to:

a. explain why the GIPS standards were created, what parties the GIPS standards apply to, and who is served by the standards;

b. explain the construction and purpose of composites in performance reporting;

c. explain the requirements for verification.

 (Institute 171)

Institute, CFA. Level I 2012 Volume 1 Ethical and Professional Standards and Quantitative Methods, 7th Edition. Pearson Learning Solutions. <vbk:9781256112754#page(171)>.

Why created

• Comparability is key
• Firms would select top performing portfolios as 'representative' or have 'survivorship bias' (firms perform weak enough to fail) and select favorable time periods
• GIPS are practicioner driven set of ethical principles

Who can claim compliance

• Complying with GIPS is voluntary - any firm may choose to comply - not typically required by law
• Must actually manage assets - can claim to 'endorse' standards but not 'comply' with them
• Software cannot be 'compliant' - only a firm can claim compliance (once it has met all the GIPS requirements)
• Compliance is firm wide, not by product/composite, and is absolute - all or none (no partial compliance)

Who benefits

• Firms - can assure clients they are seeing good data, make competitive bids, stronger internal controls
• Investors - better comparison and more confidence - however NOT a substitute for diligence

Composites

• A key part of GIPS is the required use of composites
• Composite = aggregation of one or more portfolios managed according to a similar investment mandate, objective or strategy
• Must include all actual, fee-paying, discretionary portfolios managed in that style
• Selection criteria are made on an ex-ante (before) basis

Verification

• Firm that claims compliance is responsible for verifying - self regulated
• Might hire a third party to verify compliance claim
• Must apply to whole firm
• Does not ensure accuracy
• Only tests:
• Whether portfolio construction requirements have been met
• Whether policies are designed to calculate performance in compliance w GIPS
• Cannot self verify

Structure of standards - 9 sections: Fundamentals of Compliance, Input Data, Calculation Methodology, Composite Construction, Disclosure, Presentation and Reporting, Real Estate, Private Equity, and Wrap Free/Separately Managed Account (SMA) Portfolios.

End of Reading 3.

1:00 PM

Approximately 0.5 hours