GIPS^® Tips

With 2010, changes are being proposed for the GIPS^® Standards. We have prepared a comparison document to facilitate review and comment on these proposals.

Review David Spaulding's comments regarding the GIPS 2010 proposed changes

Procedures that Need to be Documented in Writing...

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.

When is a portfolio NOT a member of 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.