Readings 3&4

Sunday, July 27, 2008

5:42 PM
Global Investment Performance Standards(GIPS)
o A set of ethical principles based on a standardized, industry-wide
approach
o Investment firms can voluntarily follow GIPS in their presentation of
historical investment results to prospective clients
o These standards seek to avoid performance misrepresentation
o Objectives
• Obtain global acceptance of calculation and presentation standards
• Ensure consistent, accurate investment performance data in areas
of reporting, marketing, and presentations
• Promote fair competition among investment management firms
• Promote global “self regulation”
o Only firms that actually manage assets can claim compliance.
o No Partial compliance. Comply on firm wide basis or not.
o Composite
• A group of individual portfolios representing a similar investment
strategy, objective, or mandate
• Must include all fee paying discretionary portfolios before the fact
and not after
o Verification
• Firms are responsible for their own claim of compliance but may
hire a 3rd party verifier
• Occurs for an entire firm and adds credibility
• Tests whether
 Firm has complied with all composite construction on a firm
wide basis
 Firm's processes and procedures are designed to calculate
performance results in compliance with GIPS standards
• When GIPS conflicts with local law, disclose conflict and obey local
law.
o Definition of a firm
• Apply GIPS on a firm-wide basis
• The firm must be identified as a distinct business unit (“firm” held
out to the public)
• Initially, present minimum of 5 years of compliant data
• If less than 5 year history, present since inception
o 8 major sections of GIPS
0. Fundamentals of compliance are issues for firms to consider
when claiming GIPS compliance
1. Input data should be consistent in order to establish full, fair,
and comparable investment performance presentation
2. Calculation methodologies are uniform in methods for
calculating portfolio and composite returns
 3. Composite construction refers to the creation of meaningful
composites for fair presentation
4.Disclosures pertain to information about the presentation and
the firm’s policies
5.Presentation and reporting standards require that investment
performance must be presented according to GIPS
6. Real estate provisions apply to all real estate investment
(land, buildings, etc.) regardless of the level of control the firm has
over management of the investment
7. Private equity must be valued according to the GIPS Private
Equity Valuation Principles
o Possible Frequent Topics in Ethics
• Research reports - fact vs opinion
• Priority of Txns- remember loyalty food chain
• Fair Dealing - watch how information is disseminated, should be
equal as much as possible. Intent is important.
• Personal Trades
 Disclose personal holdings
 No participation in equity IPOs
 Strict limits on participation: private placements
• Soft dollars
 Kickbacks from broker for client trades must be used to benefit
client, and not overhead. This belongs to client.
• Disclose, disclose, disclose - conflicts, stock ownership, warrants,
finder's fees, commissions, etc. Be broad and liberal in your
defintion
• Fair allocation of IPO's
 Disclose allocation procedures
 Does IPO fit in investment profile?
• Prudent Man vs Prudent Investor Rule
 Look at portfolio and not individual investment
• Professional misconduct - fraud, dishonesty, deceit,
misrepresentations
• Laws and regulations - how do you act when standards and laws are
in conflict
 Go with most strict law
• Investment objectives - always use existing policy statement until
changes are discussed with client