Level 1 CFA® Exam:
GIPS Standards
The Global Investment Performance Standards (GIPS) are covered alongside the Code of Ethics and Standards of Professional Conduct in one of the Ethics readings. It is a required portion of knowledge for level 1 CFA candidates only.
Global Investment Performance Standards (GIPS) are ethical principles for standardized calculation and presentation of investment performance set by CFA Institute and applied voluntarily by numerous firms, organizations, etc. all around the world.
The newest 2020 edition of the GIPS standards has 3 chapters:
- GIPS Standards for Firms – to be followed by firms, organizations, etc. that compete for business and those asset owners that market their services
- GIPS Standards for Asset Owners – to be followed by asset owners that do not market their services
- GIPS Standards for Verifiers – to be followed by verifiers when conducting an independent verification or performance examination
CFA candidates are required to know parts of the Global Investment Performance Standards for Firms, including the Preface, the Introduction, and Section 3.A. (Composite and Pooled Fund Maintenance – Requirements). You can find the complete version of the GIPS for Firms on the CFA Institute website (also cf. our e-book for more details).
Companies often use different methodologies to measure their performance, which makes the comparison among companies impossible or difficult (even for companies which value ethics).
Moreover, many companies may adopt different misleading practices, which hinders comparison and evaluation even more.
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The GIPS standards are a set of requirements and recommendations considered the best practice in the investment industry. They govern the investment performance process from data input to performance presentation.
The integrity of input data and the application of specific calculation methodologies are required. Also, a notion of composite is used to allow accurate investment performance measurement and presentation.
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The GIPS standards application is voluntary.
A company can comply either fully or not at all (no partial compliance claim nor reference to the GIPS standards for just some of the company’s products or composites is allowed).
Compliance with all the GIPS requirements is demanded, including any updates, interpretations, etc. For full compliance, adherence to recommendations may be also needed alongside adherence to requirements (which is always obligatory!).
Who Can Claim Compliance
Any investment management company that manages assets can become GIPS-compliant.
However, only a company that manages assets can claim compliance once it meets all the requirements of the GIPS standards. No software vendor or any consultant can claim compliance, even though they can claim to endorse the standards.
The company is responsible for its claim of compliance and maintaining compliance with the GIPS standards. Thus, companies are strongly encouraged to perform periodic internal compliance checks.
What is least likely an obligatory disclosure for a GIPS-compliant company?
- a. Disclosure of the company’s policies
- b. Disclosure of the company’s claim of compliance
- c. Disclosure that the company does not use leverage
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Verification
For better assurance of investors and the company’s internal procedures improvement, it is best if the company has verification performed from time to time. Such verification must be carried out by an independent third party.
The purpose of verification is to see whether:
- the company’s regulations are written to comply with the GIPS standards,
- the company complies with all the requirements on composite construction on a company-wide basis.
If a company wishes to be GIPS-compliant, it must comply with the GIPS standards on a company-wide basis. What is the most accurate decision for a GIPS-compliant company in case of a conflict with local laws?
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Both companies and investors benefit from compliance with the GIPS standards. Also, the whole investment industry, as well as relevant authorities benefit hugely.
Thanks to the GIPS standards:
- companies avoid misrepresentations and communicate all relevant information,
- there’s greater investor confidence owing to complete and fairly presented investment performance,
- investors worldwide can compare investment performance among different companies (even from various countries).
There are 8 sections of the GIPS for Firms:
- Fundamentals of Compliance
- Input Data and Calculation Methodology
- Composite and Pooled Funds Maintenance
- Composite Time-Weighted Return Report
- Composite Money-Weighted Return Report
- Pooled Fund Time-Weighted Return Report
- Pooled Fund Money-Weighted Return Report
- GIPS Advertising Guidelines
Both requirements and recommendations are specified for each section.
Section 3.A. Composite and Pooled Fund Maintenance – Requirements is your obligatory reading. You can find the complete version of the GIPS for Firms on the CFA Institute website (also see our e-book for more details on each section).
Some Definitions
REQUIREMENTS vs RECOMMENDATIONS
requirements = a company that wants to be GIPS-compliant must obey all of the GIPS requirements
recommendations = a company that wants to be GIPS-compliant is encouraged to follow
the GIPS recommendations, which are considered industry best practices and help to maintain compliance
FUNDAMENTALS of COMPLIANCE
definition of the company = foundation of company-wide compliance, it should define the company’s assets as broadly and accurately as possible
company’s definition of discretion = criteria used for including portfolios in a particular composite, they should be based on the company’s ability to implement its investment strategy
REPORT SECTIONS
composite = when all actual, discretionary, fee-paying portfolios managed according to a similar mandate, objective, or strategy (both currently and historically) are presented together
composite return = asset-weighted average of the performance of all portfolios on the composite
- Global Investment Performance Standards (GIPS) are ethical principles for standardized calculation and presentation of investment performance set by CFA Institute and applied voluntarily by numerous firms, organizations, etc. all around the world.
- The newest 2020 edition of the GIPS standards has 3 chapters: (i) GIPS Standards for Firms, (ii) GIPS Standards for Asset Owners, and (iii) GIPS Standards for Verifiers.
- The GIPS standards are a set of requirements and recommendations considered the best practice in the investment industry. They govern the investment performance process from data input to performance presentation.
- The definition of a composite is crucial for the GIPS standards. A composite is when all actual, discretionary, fee-paying portfolios managed according to a similar mandate, objective, or strategy (both currently and historically) are presented together.
- Only a company that manages assets can claim compliance once it meets all the requirements of the GIPS standards. A company can comply either fully or not at all.
- Both companies and investors benefit from compliance with the GIPS standards. Also, the whole investment industry, as well as relevant authorities benefit hugely.