The
Resource Center - GIPS / AIMR-PPS® Tips
Highlighted
Gold Gips & Dave Spaulding's Comments
to AIMR Regarding Them
With
the changeover from AIMR-PPS to GIPS, there are a few details that
need to be addressed under GIPS that did not exist under PPS. We will,
over time, add tips toward the handling of these new elements or direct
you to areas that have suggestions and/or answers to these issues.
We
do recommend that anyone dealing with the standards in the investment
industry should register for updates from the CFA Institute. This
can be done from their website - www.cfainstitute.org.
One
new area that must be dealt with is the establishment of written
policies and procedures. Another question we have heard often
is when is a portfolio NOT a member of a composite.
We have lists of suggestions to help with these issues.
If
there are areas that you would like to see addressed or any information
you feel we should add, please let us know by sending e-mail to info@spauldinggrp.com
What
firms should have policies and procedures for:
1.
How you calculate performance (your formula(s); how you handle cash
flows (start-of-day; end-of-day); if overrides are permitted) (this
is applicable for both portfolio returns as well as composite returns).
2. Composite Construction (the rules to create composites; who makes
the decision; who reviews these decisions; what happens if you discover
a portfolio was in the wrong composite).
3. Process for handling new accounts (who makes the decisions as to
what composite(s) they go into).
4. Process for termination/portfolios (what occurs when a relationship
ends; tracking; removal from composites).
5. Change in styles/ strategy (how handled when a client requests
a change; timing).
6. Discretion (your rules for discretion).
7. Minimum Account Size (if one exists, what happens when an account
falls below / goes above).
8. How you calculate Gross of Fee returns (what is your formula).
9. How you calculate Net of Fee returns (what is your formula; how
you handle if the fees are paid externally).
10. Pricing procedures/sources (this is more important w/non-US investing,
but worth touching on for domestic, too; also, for FX rates - again,
for non-US; includes sources of pricing, and rates, as well as the
timing you use for pricing; also, if there are known differences between
these and the composite's associated benchmark).
11. Treatment of cash flows (how you handle them from a return perspective
(touched on in #1, above - start-of-day, end-of-day) as well as temporary
removal (#12 below).
12. Temporary removal of portfolios (circumstances that would warrant
removal; include, if appropriate, for large flows (criteria; timing)).
13. Policy on reporting (what you give to clients, prospects; how
handle special situations).
14. How you handle as-of adjustments to returns (e.g., when a situation
arises that may require a change in the originally published number(s);
timing, circumstances when adjustments would be made; to whom you
communicate, etc.) Stephan Illmer and David Spaulding addressed this
topic in an article in the Summer 2003 issue of The Journal of
Performance Measurement, titled "Adjustments to Prior Period
Returns." See also the IPC guidance on error correction.
15. Portability issues - how were mergers/acquisitions handled (where
applicable).
16. Corporate action processing - how handled. This can be an issue
when, for example, there's a spin-off and you don't have all of the
details for some time, meaning you may have to revisit a previously
processed action.
17. Carve-outs - How you do the carving out (what method you employ;
if it's changed over time). Also, you should include the details on
how you decide when to do a carve-out
18. Measure(s) of dispersion - what measure(s) is (are) used; under
what circumstances you might use one (e.g., standard deviation) rather
than another (e.g., high/low).
19. Initial Composite Construction (the process that was used to create
the composites).
20. Record keeping (a firm must maintain the data necessary to support
its claim of compliance. If the firm presents five years of performance
history, it must maintain the records to support that claim. If records
are lost or destroyed, as long as a firm can recapture the information
to support its performance record, the firm can claim compliance as
long as all of the other requirements of the Standards are met.) Also,
see the IPC guidance on record keeping.
21. Policy on the accrual of interest and dividend income.
22. Policy on market valuation of investment securities.
23. Policies regarding the use of securities and/or countries not
included in a composite's benchmark.
24. Policy on the use of leverage and other derivatives.
25. Any other policies and procedures relevant to performance presentation.
The
seven reasons why a portfolio may not be in a composite:
1.
New account - hasn't been under management long enough to be included.
2. Terminated account
3. Below minimum asset size
4. Large cash flow has occurred
5. Change in investment style (in a transition state; removed from
the old-style composite; awaiting movement into the new composite)
6. Non-discretionary
7. Non-fee paying
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