GIPS standards advanced - Presentation reporting and verific...

Learning Outcomes

After studying this article, you will be able to explain the key requirements for GIPS-compliant performance presentations, identify necessary disclosures and presentation elements, and distinguish between the GIPS verification process and firm-level attestations. You will learn how to evaluate and improve compliance with GIPS standards for both reporting and verification, as required for CFA Level 2.

CFA Level 2 Syllabus

For CFA Level 2, you are required to understand the requirements for presenting compliant performance under the GIPS standards. Focus your revision on:

• Defining the required elements of GIPS-compliant performance presentations
• Identifying and applying required disclosures for compliant and non-compliant performance
• Describing the purpose and scope of GIPS verification, including differences between firm-level and composite-level verification
• Explaining what must be included and what is prohibited in GIPS performance reporting

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which aspect is not required in a GIPS-compliant performance presentation?
   1. Fees and expenses disclosure
   2. Disclosure of benchmark returns
   3. Past performance guarantees
2. Which statement best describes GIPS verification?
   1. Mandatory for all GIPS-compliant firms
   2. Provides assurance on a single composite
   3. Confirms firm-wide compliance

3. What is the minimum period for which performance must be presented to claim GIPS compliance?

4. True or false? Firms may present non-GIPS compliant results as GIPS-compliant if proper explanation is included.

Introduction

The Global Investment Performance Standards (GIPS) set fundamental requirements to ensure fair, consistent, and transparent presentation of investment performance. Presentation and reporting under GIPS aim to enable comparability and increase investor confidence. This article explains the mandatory disclosures, calculation methods, and procedures necessary for compliant presentations, and highlights the role and process of GIPS verification.

Key Term: GIPS performance presentation
A report containing all required GIPS-compliant statistics, measures, and disclosures, presented in accordance with GIPS standards to enable fair comparison and transparency.

Key Term: GIPS verification
An independent review by a qualified third party confirming that a firm’s policies, procedures, and composite construction are in compliance with GIPS standards on a firm-wide basis.

GIPS Presentation Requirements

Firms claiming GIPS compliance must present performance reports that include all prescribed elements. Key requirements include:

• Minimum of 10 years of annual performance (or since inception if shorter), updated annually.
• Inclusion of performance for all discretionary, fee-paying portfolios in at least one composite.
• Presentation of returns using appropriate methods (usually time-weighted for most asset classes), net of fees and expenses.
• Clear labeling of each presentation as GIPS compliant and specifying the definition of a "firm."
• Required disclosures about benchmarks, currency, significant events, calculation methodologies, and the treatment of fees and taxes.
• Explanation of composite construction policies, including inclusion and exclusion rules.

Key Term: composite
An aggregation of individual portfolios managed to a similar investment mandate, objective, or strategy, used as the unit of GIPS performance reporting.

Required and Prohibited Disclosures

Presentations must clearly identify all:

• Periods and portfolios included
• Changes in personnel or investment style that could affect comparability
• Major cash flows and rebalancing rules
• Use of borrowing or derivatives, if material
• The location or length of additional information available, if the presentation is "one-pager"

Prohibited items:

• GIPS presentations must not include statements guaranteeing performance or implying future results based on past returns.
• Performance must not be cherry-picked—selective omission or presentation of only favorable composites or portfolios is forbidden.

Worked Example 1.1

A firm has track records for five years but merged two composites three years ago. How should the firm present historical GIPS-compliant results for the composite?

Answer:
Performance must be shown for the composite since inception, including periods before the merger, using documented, consistent methodology. Disclosures should explain the merger and any changes to composite construction.

GIPS Verification: Scope and Importance

GIPS verification is a process where an independent verifier assesses whether a firm's policies and procedures are GIPS-compliant. Verification is firm-wide, not composite-specific.

Verification focuses on:

• The existence of firm-level policies and procedures required by GIPS
• Proper formulation and maintenance of all composites
• All actual, discretionary, fee-paying portfolios are included in at least one composite

Verification does not guarantee the accuracy of a single composite’s return but affirms the overall framework’s compliance.

Firms are not required to undertake verification; however, doing so increases investor confidence and may be a practical necessity for competitive marketing.

Worked Example 1.2

An asset management firm receives a verification report covering the firm but not specific composites. Can it state its largest equity composite is "GIPS verified"?

Answer:
No. Verification applies only to the firm. The firm may state it has been verified but cannot claim verification for individual composites.

Exam Warning

Verification of a single composite is not permitted under GIPS. Only firm-wide verification is recognized.

Reporting Non-Compliant Performance

If a firm presents results for periods that pre-date compliance or cannot fully comply, it must clearly distinguish non-compliant from compliant periods, with prominent disclosures specifying the shortcomings. Non-compliant results may not be presented as GIPS-compliant, nor combined with compliant periods to imply compliance for the whole track record.

Worked Example 1.3

A firm is newly compliant and wishes to present three years of older results calculated using different methodologies. How should it do this?

Answer:
The GIPS-compliant period must be shown separately, with the earlier results clearly designated as non-compliant and accompanied by a description of differences and limitations.

Revision Tip

For the exam, remember: all actual, discretionary, fee-paying portfolios must be included in a composite. Exclusions are not allowed.

Summary

GIPS-compliant presentation and reporting ensure performance data is transparent, complete, and fair. Required disclosures and calculation rules minimize the risk of misleading information. Verification, while optional, enhances credibility but does not apply to single composites. Firms must not imply compliance for periods, portfolios, or composites not meeting all GIPS requirements.

Key Point Checklist

This article has covered the following key knowledge points:

• GIPS-compliant presentations require 10 years of annual, composite-level, net-of-fee performance (or since inception)
• All fee-paying, discretionary portfolios must be included in at least one composite
• Required disclosures cover methodology, benchmarks, fees, currency, and material events
• Prohibited statements include guarantees of future performance and selective performance display
• GIPS verification is firm-wide; verification of single composites is not allowed
• Non-compliant periods must be clearly separated and properly disclosed

Key Terms and Concepts

• GIPS performance presentation
• GIPS verification
• composite