Overview of the Global Investment Performance Standards

The GIPS standards let prospective clients compare track records with confidence by requiring complete, consistently calculated and fully disclosed performance. This module explains why the standards exist and how the firm is defined, applies the rules for returns, cash flows, fees and valuation, builds composites without cherry-picking, sets out what a GIPS Composite Report must contain and when a track record can move with a team, and explains what verification does and does not cover.

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What you will learn

1. Explain the purpose, scope and benefits of the GIPS standards, how the firm and its discretion are defined, and what a firm-wide claim of compliance requires.

GIPS rests on fair representation and full disclosure; the 2020 edition took effect on 1 January 2020.
Only firms (and asset owners) can claim compliance, never individuals, products or single composites.
The firm is the entity held out to clients as a distinct business; compliance is firm-wide with no partial claims.
Total firm assets include discretionary and non-discretionary assets, fee-paying or not, and sub-advised assets the firm selected; advisory-only assets are excluded.
Non-discretionary portfolios count in total firm assets but are excluded from composites.

2. Apply GIPS requirements on return calculation, external cash flows, cash, fees and valuation.

Time-weighted returns are required, with valuations at least monthly and on the date of every large cash flow.
Modified Dietz approximates the time-weighted return between valuations.
Money-weighted returns are allowed when the firm controls cash flows and the portfolios are closed-end, fixed-life, fixed-commitment or illiquid.
Composite returns are asset-weighted; cash held in portfolios must be included.
Gross-of-fees = after transaction costs; net-of-fees = also after investment management fees.
Fair value uses the most objective inputs available, from quoted prices down to model inputs.

3. Construct composites correctly, including the treatment of discretion, mandates and the timing of adding and removing portfolios.

All actual, fee-paying, discretionary portfolios must be in at least one composite; non-discretionary ones must not be.
Model or simulated results can never be included in or linked to composite performance.
New portfolios join under a documented, consistent policy; terminated portfolios stay through their last full period.
A portfolio switches composites only after a documented change in mandate, and its history stays behind.
Minimum asset levels and significant cash flow policies are set in advance and never applied retroactively.

4. Apply the GIPS requirements for presenting and reporting performance, including required statistics, and the conditions for performance portability.

Start with at least five years (or since inception) and build to ten years of compliant performance.
Each year: composite and benchmark returns, composite and firm assets, number of portfolios and internal dispersion (both not required if five or fewer).
Three-year annualised ex post standard deviation of composite and benchmark, from monthly returns.
Never annualise returns for periods shorter than one year.
Portability requires substantially all decision makers, an intact independent process and supporting records.

5. Describe the purpose, scope and process of GIPS verification, and distinguish it from a performance examination.

Verification is voluntary, performed by an independent third party, and always firm-wide.
It tests composite and pooled fund construction and whether calculation and presentation policies are designed and implemented in compliance.
It does not certify the accuracy of any specific composite return or report.
A performance examination tests a specific composite or pooled fund, together with or after verification.
A verifier cannot test calculations or systems it produced itself; verification does not replace operational due diligence.

Module at a glance

GIPS rests on fair representation and full disclosure; only firms (and asset owners) comply, firm-wide, with no partial claims.
Total firm assets include all discretionary and non-discretionary assets the firm manages; advisory-only assets are excluded.
Time-weighted returns with valuations at month-end and at large cash flows; cash is included; gross is after transaction costs, net also after management fees.
Every actual, fee-paying, discretionary portfolio belongs in a composite; models never do; history stays put when portfolios leave or switch.
Reports start with five years, build to ten, show annual returns, assets, dispersion and three-year ex post standard deviation, and never annualise partial years.
Portability needs substantially all decision makers, an intact independent process and supporting records.
Verification is independent and firm-wide; composite-level testing is a performance examination, and neither certifies specific returns.

This free module has 5 lessons, 18 practice questions with full explanations and 1 essay case with a model answer.

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