GIPS -To Comply , Verify, or Abstainthe Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS® standards. [Insert

GIPS® - To Comply, Verify, or Abstain

GIPS® 101 – Crash Course on the Global Investment

Performance Standards®

Definition of DiscretionDiscretion is the ability of the firm to implement its intended strategy

Firms must document their definition of discretion & apply consistently

Considerations:

• Restrictions• Account size• Taxes

Policies & ProceduresRequired to claim compliance

Framework for maintaining compliance

Includes both firm and composite specific policies

Must maintain both current and historical P&P documentation

Asset-weighted ReturnsAsset-weighting formula:

[(BMV1/TOTAL BMV) × Rtn1] [(BMV2/TOTAL BMV) × Rtn2]

+ [(BMVn/TOTAL BMV) × Rtnn]

Larger accounts have a larger impact on composite performance. The ability of a manager to manage $1,000,000 tells more about his capability than does a $50,000 account.

Time-Weighted Rate of Return

The return formula for a single cash flow:

If there are multiple cash flows during the measurement period, the day-weighted cash flows can be summed together and added to the beginning portfolio value:

ROR = EMV – BMV – CF

BMV + w × CF

ROR = EMV – BMV – ΣCFBMV + Σ(w × CF)

Composite ConstructionComposites must be defined according to similar investment objectives and/or strategies

Firms must apply criteria for defining composites consistently

Include new portfolios on a timely & consistent basis

Terminated portfolios must be included in historical composite returns

Portfolios are not permitted to move from one composite to another unless documented changes in client guidelines or the redefinition of the composite make it appropriate

Composite Specific ConsiderationsImportant Composite Specific Policies and Procedures:

• Composite Definition – Define Criteria of Accounts to be Included in the Composite.

• Select Composite Benchmark(s).

• If applicable, Account Minimum Policies (i.e. Monitoring).

• Treatment of Significant Cash Flows.

Firm ResponsibilitiesFirms must make every reasonable effort to provide a compliant presentation to all prospective clients (within the previous 12 months)

Firms must not choose to whom they present a compliant presentation.

If the advisor claiming compliance with GIPS®

readily knows the recipient of performance information (i.e., a one-on-one presentation), then a fully compliant disclosure presentation must be provided.

GIPS® Statistical Requirements

10-year track record (or since inception)

Annual composite returns

Annual benchmark returns

Measure of dispersion of individual portfolio returns for each annual period

3-year annualized standard deviation of the composite and benchmark (1/1/2011)

GIPS® Statistical Requirements(continued)

Number of accounts in the composite

Asset value of accounts in the composite

Either the total firm assets or the percentage of the total firm assets the composite represents

Percentage of non-fee-paying assets (if applicable)

GIPS® Disclosure Requirements

Claim of Compliance

Firm Definition

Composite Definition

Benchmark Description

Fee Schedule

Minimum asset level

Etc.

One-on-One PresentationsMaterials offered to a prospective client through a communication or presentation that is of a private and confidential nature and that is not made to the public through any print, electronic or other medium

Made in a setting that provides prospects the opportunity to discuss with the advisor the types of fees that might be paid

RFPs & QuestionnairesAlso considered one-on-one presentations:• Requests For Proposals or Information (RFP/RFI) • Consultant Questionnaires• Databases

Firms must attach a fully compliant presentation to the questionnaire or RFP (or send via email)• Example presentation shown on next slide

Statements prohibitedStatements referring to the calculation methodology as being “in accordance,” “in compliance,” or “consistent” with GIPS®, or similar statements are prohibited.

Statements referring to the performance of a single, existing client portfolio as being “calculated in accordance with GIPS®” are prohibited, except when reporting the performance of an individual client’s portfolio to that client.

Web/Internet Advertisements

Previously considered to be an “enhanced advertisement” with additional requirements

Now, no separate internet-specific requirements

Firms are able to apply the general GIPS®

Advertising Guidelines if they choose to include the claim of GIPS ® compliance on a website

GIPS® Advertising GuidelinesAllow a GIPS ® compliant firm to state that it is compliant with GIPS ® in something other than a fully compliant presentation

Advertising Guidelines do not replace the GIPS ®

standards; must still provide a fully compliant presentation to a prospective client

Guidelines are voluntary

You can always choose to include a fully compliant presentation in an advertisement

Sample Advertisement Presentation

Supplemental InformationAny performance-related information that supplements or enhances the required or recommended disclosures of the GIPS ®

standards

It must not contradict or conflict with the information provided in the fully compliant presentation

Examples of Supplemental Information

Carve-out returns that exclude cashNon-portable returnsModel, hypothetical, backtested, or simulated returnsRepresentative account informationAttributionSpecific holdingsPeer group comparisonsRisk-adjusted performance

Recordkeeping RequirementsNo checklist, but must support claim of compliance• Presentation disclosures• Policies and Procedures

Composite level records• Year end numbers, dispersion, weighted values

Portfolio level records• Valuations, transactions, fees• Portfolio assignments

Error Correction

Required beginning January 1, 2010

Key Requirements:• Must establish error correction policies and

procedures• Must implement the policies and procedures

consistently• Must define materiality in the error correction

process

Wrap/SMA

Bundled Fee Accounts

Performance• Gross is typically “pure”• Net must be net of the entire fee

Disclosures• Percentage of bundled fee accounts• Describe what is included in fee

Records

Portability RequirementsPresenting a track record from a prior firm

Same investment team

Same investment strategy and process

Books and records

No gap in performance

GIPS® 2010:An Overview of the newly adopted version of the 2010 edition of the GIPS® standards

GIPS® 2010: Executive Summary

Effective date of January 1, 2011

• Compliant presentations that include performance results for periods after December 31, 2010 must meet all the requirements

• Early adoption is encouraged

Scope of ChangesVirtually every page of the Standards has been rewritten.

Very Few Action Items applicable to all Compliant Firms:• New/revised disclosures (3)• New calculation/presentation requirement:

External standard deviation• New policy and procedure documentation (2)

Additional/Revised Requirements that may be new to your firm

Implied Requirements Restated Explicitly

New Real Estate [and/or Private Equity] Provisions

Claim of Compliance

4.A.1 Once the firm has met all the requirements of the GIPS® standards, the firm MUST disclose its compliance with the GIPS ® standards using one of the following compliance statements. The claim of compliance MUST only be used in a compliant presentation.

New Requirements/Action Items

Claim of Compliance

Instead of one (1) compliance statement for everyone…

• “[Insert name of FIRM] has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®).”

There are now three (3) compliance statements from which to choose…


Compliance statement for firms that are notverified:

• “[Insert name of FIRM] claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS® standards. [Insert name of FIRM] has not been independently verified.”


Compliance statement for firms that ARE verified:• “[Insert name of FIRM] claims compliance with the Global

Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS ®

standards.”[Insert name of FIRM] has been independently verified for the periods [insert dates]. A copy of the verification report(s) is/are available upon request.”

Plus an additional paragraph:• “Verification assesses whether (1) the firm has complied with all

the composite construction requirements of the GIPS ® standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS ® standards. Verification does not ensure the accuracy of any specific composite presentation.”


Compliance statement for composites of a verified firm that have also had a performance examination:

• “[Insert name of FIRM] claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS®

standards. [Insert name of FIRM] has been independently verified for the periods [insert dates].

• Verification assesses whether (1) the firm has complied with allthe composite construction requirements of the GIPS® standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS® standards. The [insert name of composite] composite has been examined for the periods [insert dates]. The verification and performance examination reports are available upon request.


Composite Description

4.A.3 “Firms must disclose the composite description.

Definition of COMPOSITE DESCRIPTION added to Glossary: … MUST include all key features of the composite and MUST include enough information to allow a prospective client to understand the key characteristics of the composite’s investment mandate, objective or strategy


Composite Description (continued)

Sample composite description from GIPS®

2005:


Composite Description (continued)

Sample Composite Descriptions from GIPS®

2010-Appendix C


Available Information

4.A.12 Firms must disclose that policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.

Underlined items are new.


External Standard Deviation

5.A.2 For periods ending on or after 1 January 2011, firms MUST present, as of each annual period end:

• a) the three-year annualized ex-post standard deviation (using monthly returns) of both the composite and the benchmark; and

• b) an additional three-year ex-post risk measure for the benchmark (if available and appropriate) and the composite, if the firm determines that the three-year annualized ex-post standard deviation is not relevant or appropriate. The periodicity of the composite and benchmark MUST be identical when calculating ex-post risk measure.

External standard deviation = volatility

Internal standard deviation = composite dispersion


External Standard Deviation (continued)

4.A.33 Firms MUST disclose if the three-year annualized ex-post standard deviation of the composite and/or benchmark is not presented because 36 monthly returns are not available.

Firms SHOULD:

5.B.3 For periods prior to 1 January 2011, present the three-year annualized ex-post standard deviation

5.B.4/5.B.5 Present annualized composite and benchmark returns for the same periods the ex-post standard deviation is presented


Incorporating a Valuation Hierarchy

0.A.13 “For periods beginning on or after 1 January 2011, total firm assets MUST be the aggregate FAIR VALUE of all discretionary and non-discretionary assets managed by the firm. This includes both fee-paying and non-fee-paying portfolios.”

Fair value has replaced market value throughout the Standards. Fair valuation procedures are outlined in the GIPS®

Valuation Principles, Section II.


Incorporating a Valuation Hierarchy (cont.)

Firms MUST use the objective, observable, unadjusted quoted market prices for identical investments in active markets on the measurement date, if available.

A firm’s valuation policies and procedures MUST address situations where the market prices may be available for similar but not identical investments, inputs to valuations are subjective rather than objective, and/or markets are inactive instead of active.



Firms MUST disclose if their valuation hierarchy materially differs from the recommended hierarchy within GIPS®.

Any change in the valuation methodologies or assumptions must be documented in the firm’s valuation policies and procedures.

In the absence of a readily observable appropriate market price, the valuation MUST represent the firm’s best estimate of the market value and include accrued income.



a)The first stop on the valuation hierarchy: Investments MUST be valued using objective, observable unadjusted quoted market prices for identical investments in active markets on the measurement date. If not available, then investments SHOULD be valued using:

b) Objective, observable quoted market prices for similar investments in active markets. If not available or appropriate, then investments SHOULD be valued using…



c) Quoted prices for identical or similar investments in markets that are not active (markets in which there are few transactions for the investment, the prices are not current, or price quotations vary substantially over time and/or between market makers). If not available or appropriate, then investments SHOULD be valued based on…

d) Market-based inputs, other than quoted prices, that are observable for the investment. If not available or appropriate, then investments SHOULD be valued based on…



e) Subjective, unobservable inputs for the investments where markets are not active at the measurement date. Unobservable inputs should only be used to measure fair value to the extent that observable inputs and prices are not available or appropriate. Unobservable inputs reflect the firm’s own assumptions about the assumptions that market participants would use in pricing the investment and SHOULD be developed based on the best information available under the circumstances.

Note: After January 1, 2011, firms MUST disclose if portfolio investments are valued using subjective, unobservable inputs that are material to the composite as of each period end. Such disclosure is recommended for periods prior to January 1, 2011.


Incorporating a Valuation Hierarchy (cont.)1.A.2 For periods beginning on or after January 1, 2011, portfolios MUST be valued in accordance with the definition of fair value and the GIPS®

Valuation Principles in Chapter II.

1.B.2 Valuations SHOULD be obtained from a qualified independent third party”

4.B.1 Firms SHOULD disclose material changes to valuation policies and/or methodologies

4.B.4 Firms SHOULD disclose the key assumptions used to value portfolio investments.


Ensuring the Existence of Client Assets

0.A.5 Firms MUST document their policies and procedures used in establishing and maintaining compliance with the GIPS® standards, including ensuring the existence and ownership of client assets, and MUST apply them consistently.


Minor ChangesEliminated some significant cash flow removal disclosures

Disclose what fees are netted out of gross

Benchmark description – Readily recognizable

Materiality disclosures

• Short positions, leverage, withholding taxes

Updated Glossary

• Prospective Client

• Linking

GIPS® – Industry Trends and Key Changes

Trends and ChangesUMA/ SMA Accounts

What qualifies as assets under management?

Enhanced disclosure for composite definitions

Legal vs. GIPS® definition of discretion

Trends and ChangesCarve out prohibition

Revaluation of performance periods

Hedge Fund/Alternative Investments• New Guidance Statement Open for Comment

Books and records for portable track records

Trends and ChangesInclusion of risk metrics in the Standards

New Real Estate and Private Equity Requirements

Error Correction

Trends and ChangesVerification is not an audit

Databases, a prospective client?

Firm-wide Composites vs. Marketed Composites

The Verification Process

VerificationVerification tests:

• Whether the firm has complied with all the composite construction requirements of the GIPS® standards on a firm-wide basis, and

• Whether the firm’s processes and procedures are designed to calculate and present performance results in compliance with the GIPS ® standards

Verification Procedures

Pre-verification Procedures include• Knowledge of the GIPS® standards

• Knowledge of the Performance standards

• Knowledge of the firm

• Knowledge of firm policies

• Knowledge of the valuation basis for performance calculations

Verification Procedures

Verification Procedures include• Appropriate definition of firm• Composite construction follows GIPS®

o Composites are defined and maintainedo All discretionary, fee-paying accounts are in a compositeo Consistent application of firm’s definition of discretiono No accounts that belong in a composite have been

excludedo Composite benchmarks are consistento Guidelines for composite construction have been

consistently applied o Firm’s list of composites is completeNon-discretionary accounts

Verification ProceduresVerification Procedures Cont.• Sample account selection of new/closed accounts• Account review

o Timing of account inclusion/exclusion in composites is in line with stated policy

o Accounts are appropriately placed o Existence of accounts in compositeso All accounts in a composite follow the same strategyo Shifts from one composite to another are client

driven• Performance measurement calculation• Disclosures• Maintenance of records

Verification and Examination

A verification tests:• Whether the firm has complied with all the

composite construction requirements of GIPS® on a firm-wide basis, and

• Whether the firm’s processes and procedures are designed to calculate and present performance results in compliance with GIPS®

A performance examination is: • A specifically focused examination (or performance

audit) of a composite presentation• More extensive than a verification• Can only be conducted concurrently with or upon

completion of a verification

Performance ExaminationA drill-down into one or more specific composite’s performance track record (aka “performance audit”)

Performed concurrent with and/or after a verification

Firms cannot claim that a composite has been “verified” but can claim that the composite has been “examined” or “audited,”when applicable

Performance Exam ProceduresPerformance Exam Procedures,

tests for a specific composite, 1) whether the firm has constructed and calculated the composite in compliance with the GIPS® standards, and 2) whether the firm presents the composite in compliance with the GIPS® standards.

•Sample Portfolio Selection•Cash Flows•Income and Expenses•Portfolio Trade Processing•Portfolio Valuation •Performance Measurement Calculation•Composite Presentation Information and

Disclosures•Maintenance of Records

Engagement Timeline

Welcome Call/Quick Start Request Letter

Initial Call/GIPS® Policies and Procedures

Initial Data Requests

Office Visit & Additional Requests

Review

Issuance of Reports

Data RequestsQuick Start Request

Initial Request

Request for Documents

Office Visit

Typically 1-5 days

1-3 Verifiers

Documents reviewed:1. Contracts & Investment Guidelines2. Termination Letters3. Custodian /Bank Statements

Ongoing VerificationReview of documents is split over the course of one year• Contracts, Investment Guidelines, and Termination

letters reviewed each quarter• Custodian/Bank Statements reviewed during

second quarter

Quarterly/Annual Quick Starts & Request for Documents

Annual Office Visit

How to PrepareEnsure there is a firm-wide commitment by senior management

Set up reasonable deadlines

Document policies and procedures

Identify Contacts for Verification 1. Institutional Memory2. Knowledgeable Staff3. Stakeholders

Why get a verification?Verification will increase the understanding and professionalism of performance measurement teams and consistency of presentation of performance results.

Third-party verification brings credibility to the claim of compliance and supports the overall guiding principles of full disclosure and fair representation of investment performance.

Verification is strongly encouraged by the GIPS®

Standards and by a growing number of investors

Perceived Cons of Verification

Requires resources• Time• Money• Expertise

Pros of VerificationCredibility

Strengthens internal controls

Avoid a false claim and subsequent regulatory action

On-going GIPS® consulting

Verification Trends

More than just a performance checkTesting is not uniform • agreements or accounting details to support

conclusions

Existence testingConsulting services have become more important

Every verifier has a different process

Questions?/ Answers! Ashland Partners & Company LLP

525 Bigham Knoll, Suite 200Jacksonville, OR

www.AshlandPartners.com

Richard Kemmling, CPA, CIPMPartner

Main: (541) 857-8800Direct: (541) 864-1658

Email: [email protected]

Jason Millard, CFA, CIPMSenior Consultant

Main: (541) 857-8800Direct: (541) 842-8404

Email: [email protected]

http://www.ashlandpartners.com/

mailto:[email protected]

mailto:[email protected]