Learning Outcomes
After reading this article, you will be able to identify and explain the essential GIPS disclosure, presentation, and reporting requirements for firms and pooled funds. You will recognize which policies, data, and caveats must be included in compliant presentations, distinguish disclosure rules from recommendations, and apply key principles to sample scenarios in CFA Level 3 exam contexts.
CFA Level 3 Syllabus
For CFA Level 3, you are required to understand the detailed Global Investment Performance Standards (GIPS) requirements governing disclosure and presentation for both firms and pooled funds. This article focuses on:
- The core disclosure requirements and rationale for compliant GIPS reporting
- Proper presentation format and treatment of performance data, policies, and caveats
- Pooled fund reporting and the differences from traditional firm composite presentations
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.
- What is the fundamental difference between a required and recommended GIPS disclosure in a compliant report?
- Which disclosures must be made regarding significant changes in firm organization or investment philosophy in a composite presentation?
- What information must be included in a pooled fund’s GIPS-compliant report that is not required for a traditional composite report?
- How should a firm disclose the use of external data or model performance in a GIPS presentation?
Introduction
GIPS-compliant performance reporting is a core CFA Level 3 topic. Accurate, standardized disclosure helps investors fairly compare managers’ performance and assess key risks. Firms and pooled funds must provide clear, complete, and current disclosures in every compliant report. This article details what is required, recommended, and how disclosures differ by client type or reporting context.
Key Term: GIPS compliant presentation
A standardized report that contains all data and disclosures required by the Global Investment Performance Standards for a given composite, pooled fund, or firm.
GIPS Disclosure Requirements
Overview
Disclosure is essential to transparency and comparability. GIPS requires firms to disclose the information necessary for users to interpret the data and judge its reliability. Some disclosures are always required; others are only required if relevant to the specific composite, fund, model, or performance result.
Key Term: required disclosure
Information or caveats that must be included in every compliant presentation, regardless of audience or context.Key Term: recommended disclosure
Information that should be included to improve transparency, but is not mandatory for GIPS compliance.
Key Principles
Required disclosures must never be omitted. Typical required items include:
- The definition of the firm and the composite
- A description of the investment mandate and significant policies (e.g., valuation methods)
- The currency used and whether gross or net returns are shown
- How fees, expenses, and borrowing are treated
- The presence and impact of significant changes (e.g., key personnel, mergers, methodology changes)
- Whether external data, model portfolios, or backfilled results are included
- Any relevant legal or regulatory caveats
Recommended disclosures improve investor understanding but are not strictly mandatory. These might cover:
- Additional clarification of calculation methodologies
- Voluntary benchmarks (if not required by mandate)
- Enhanced risk disclosures or further context
Worked Example 1.1
A GIPS-compliant composite presentation adopts new valuation policies and experiences a merger mid-year. What must be disclosed, and how?
Answer:
The presentation must include disclosures describing the nature and effective date of the new valuation policy and the merger, explaining any material effects these changes have on reported returns. The firm needs to add sufficient narrative to allow a third party to judge how comparability may be affected across reporting periods.
Presentation Requirements for Firms
A compliant report must:
- Identify the composite or the firm and describe its strategy/mandate
- State which GIPS edition and version is applied
- Show a minimum 10 years of annual returns in a table or chart, or since inception if less
- Display all required risk/return data side-by-side (e.g., annualized returns, 3-year dev.)
- Clearly specify the period covered by each data point
- Provide required benchmark info, including its appropriateness and any changes
- Disclose, both in summary and detail, relevant policies, e.g. rules for inclusion, terminations, significant exceptions
If a firm manages both firm-level and pooled fund strategies, it must comply with each set of requirements as relevant—composite presentations for institutional clients, pooled fund reports for retail public funds.
Key Term: composite
An aggregated group of portfolios representing a particular investment strategy, mandate, or objective, defined according to GIPS policies.Key Term: pooled fund
A vehicle that pools assets of multiple investors and is managed as a single account, such as a mutual fund or SICAV.
Pooled Fund Presentation and Reporting
Compliant reporting for pooled funds requires specific tailored disclosures. Because investors cannot typically negotiate terms or customize mandates, GIPS-compliant pooled fund reports must emphasize:
- Identifier of the pooled fund (legal name, share class, identifier)
- Inception date, and start of GIPS-compliant performance
- All significant fees and costs—expressed as actual, net-of-fee returns
- Relevant benchmarks and reasons for their selection (or absence)
- Side-by-side display of required statistics and data
- Narrative explanation of discontinuations or material changes, e.g., closures, major revisions to mandate, material merger or model change
- Prominent explanation of which share classes or classes are being reported on and reasons for their selection
Pooled fund reports may, but are not required to, display composite or firm-level returns if they are not relevant for investors.
Worked Example 1.2
A retail investor receives a compliant presentation for a pooled fund. The fund launches multiple share classes with different fee structures. What must the fund’s GIPS-compliant report disclose?
Answer:
The report must state which share class is presented, explain the differences among classes if relevant, and disclose all fees and expenses associated with each class depicted. It must not omit or obscure required net-of-fee returns or benchmark comparisons for each class.
Exam Warning
A frequent error is omitting or inadequately disclosing the impact of switching from gross to net returns, or fee calculation changes. Failing to make this clear may cause non-compliance, even if the core results are accurately calculated.
Revision Tip
Keep a checklist and always include a full set of up-to-date, directly relevant disclosures for each report. If a relevant GIPS event occurs (e.g., change to firm definition or valuation policy), immediately update your presentations.
Summary
- Required GIPS disclosures ensure that investors are able to fairly interpret and compare results.
- All compliant presentations—composite or pooled fund—must provide complete, timely, and comprehensible disclosures.
- Differentiating between required and recommended disclosures is exam-critical.
- Pooled fund reports must prominently state share class, all fees, and benchmark context.
Key Point Checklist
This article has covered the following key knowledge points:
- Explain the core required and recommended GIPS disclosures for compliant presentations
- Distinguish presentation/reporting rules for firms versus pooled funds
- Identify what must be disclosed about fees, expenses, benchmarks, and methodology changes
- Describe the specific pooled fund reporting requirements, especially around share classes and net-of-fee returns
- Recognize the difference between a compliant composite report and a pooled fund report
Key Terms and Concepts
- GIPS compliant presentation
- required disclosure
- recommended disclosure
- composite
- pooled fund