Introduction to the Global Investment Performance Standards (GIPS)

Ethics

Composites

Learning Outcome Statement:

explain the purpose of composites in performance reporting

Summary:

Composites are essential in performance reporting under the GIPS standards to ensure fair and comprehensive representation of an investment strategy's performance. They aggregate portfolios managed under a similar mandate, objective, or strategy, and include all actual, fee-paying, discretionary portfolios to prevent selective performance representation.

Key Concepts:

Purpose of Composites

Composites serve to aggregate portfolios to provide a fair and full representation of performance across similar investment strategies, preventing firms from showcasing only their best-performing portfolios.

Inclusion Criteria for Composites

All actual, fee-paying, discretionary portfolios that fit the investment mandate, objective, or strategy must be included in a composite. This includes both segregated accounts and pooled funds if they meet the composite definition.

Ex Ante Basis for Portfolio Inclusion

The decision on which portfolios to include in a composite should be based on pre-established criteria, not selected after performance results are known, to avoid biased performance representation.

Fundamentals of Compliance

Learning Outcome Statement:

describe the fundamentals of compliance, including the recommendations of the GIPS standards with respect to the definition of the firm and the firm’s definition of discretion

Summary:

The fundamentals of compliance in the context of the GIPS standards involve adhering to specific criteria for defining the firm and its discretionary portfolios. This includes ensuring all fee-paying, discretionary accounts are included in at least one composite and defining the firm broadly to encompass all geographical offices under the same brand. The firm's discretion is determined based on its ability to implement its investment strategies without significant client-imposed restrictions.

Key Concepts:

Definition of the Firm

The definition of the firm is crucial for GIPS compliance and involves including all geographical offices operating under the same brand name. This broad definition helps in creating a clear boundary for total firm assets and ensures uniformity in compliance across different locations.

Firm’s Definition of Discretion

This defines the criteria for including portfolios in a composite based on the firm’s ability to implement its intended investment strategies. Portfolios that are significantly restricted by client-imposed conditions and do not represent the strategy accurately are considered non-discretionary and are excluded from composites.

Independent Verification

While firms self-regulate their compliance with GIPS standards, they can opt for an independent verification by a third party. This verification serves as an external validation of the firm’s adherence to GIPS standards and its compliance claims.

Verification

Learning Outcome Statement:

describe the concept of independent verification

Summary:

Independent verification is a process where a third-party verifier assesses a firm's compliance with the GIPS standards on a firm-wide basis. This process does not validate specific performance reports but ensures that the firm's policies and procedures for maintaining composites and pooled funds, as well as performance calculation and presentation, are in line with GIPS standards.

Key Concepts:

Independent Verification

Independent verification involves a third-party verifier conducting tests to ensure a firm's compliance with GIPS standards across all its operations. This process enhances the credibility of the firm's compliance claim and can lead to improved internal processes.

Scope of Verification

Verification is conducted on a firm-wide basis and does not focus on specific composites or pooled funds. It provides assurance about the firm's overall adherence to GIPS standards rather than the accuracy of specific performance reports.

Benefits of Verification

Verification can increase confidence among clients and investors regarding a firm's compliance claim, potentially offering marketing advantages and improving internal procedures.

Mandatory Third-Party Involvement

Verification must be performed by an independent third party, not by the firm itself, to ensure objectivity and credibility in the verification process.

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