Key Characteristics

• Firm definition: a direct business entity.
• GIPS are ethical standards, not legal standards, for performance presentation. The objective is to present performance results fairly and with full disclosure.
• Composites: All actual, fee-paying, discretionary portfolios must be included in at least one composite.
• Calculation and presentation requirements.
• The integrity of input data.
• There are two components: requirements and recommendations.
• Appropriate disclosure when local laws or regulations conflict with the standards.
• The eight sections of GIPS standards.
• The standards will evolve to address new aspects of investment performance.

The Nine Major Sections of the GIPS Standards

Following are the nine sections involved in GIPS. Each section has requirements and recommendations. All requirements must be met in order to be fully compliant with the GIPS. Firms are encouraged to adopt and implement the recommendations.

0. Fundamentals of Compliance.

This section deals with firm definition, policies and procedures documentation, compliance claiming, and the fundamental responsibilities of a firm. The definition of a firm and claims of compliance have been covered in the last subject.

Document Policies and Procedures

Firms must document, in writing, the policies and procedures used in establishing and maintaining compliance with all the applicable requirements of the GIPS standards.

Fundamental Responsibilities

• Firms must provide a compliant presentation for any listed composite, along with a composite description, to all prospective clients.

• Discontinued composites must be listed for at least five years after discontinuation. Firms cannot alter their performance history by excluding portfolios no longer under management or no longer managed by the same manager, or by including the performance of portfolios managed by current employees before they started working for the firm.

• Firms should establish procedures to monitor GIPS requirements and the firm's performance measurements and presentations to ensure continued compliance.

1. Input Data.

Input data requirements set standards for the collection of data necessary for calculating performance results that will be comparable across firms. For example, benchmarks and composites should be created / selected on an ex-ante basis, not after the fact.

2. Calculation Methodology.

Achieving comparability among firms' performance presentations requires uniformity in the methods used to calculate returns. The standards mandate the use of certain calculation methodologies for both portfolios and composites. For example, total returns methodology is required for compliance. Total returns include realized and unrealized capital gains/losses, interest (accrued during a valuation period), and dividends paid (considered paid on the ex-date).

3. Composite Construction.

Creating meaningful asset-weighted composites is critical to the fair presentation, consistency, and comparability of results over time and among firms.

4. Disclosure.

Firms must disclose certain information about their performance presentations and policies adopted. Disclosures are considered to be static information that does not normally change from period to period.

5. Presentation and Reporting.

After completing steps one to four, firms should incorporate this information in GIPS-compliant presentations.

6. Real Estate.

This section applies to any real estate investment or management. It applies regardless of a firm's control over the management of the investment, its profitability, or its financing.

7. Private Equity.

This section applies to all private equity investments other than open-end or evergreen funds. Private equity refers to any investment in nonpublic companies. Examples include venture investing, buy-out investing, mezzanine investing, fund-of-funds investing, secondary investing, etc.

8. Wrap Fee/ Separately Managed Account (SMA) Portfolios.

This section applies to wrap fee/ SMA portfolios. A wrap fee is a comprehensive charge levied by an investment manager or investment advisor on a client for providing a bundle of services, such as investment advice, investment research, and brokerage services.