This is a comprehensive list of Q&A’s released as part of the GIPS standards Newsletter, organized by subject matter.  As CFA Institute continues to add Q&As through the GIPS Standards Newsletter, we will continue to update this page.

GIPS 2010 Transition to GIPS 2020

Pooled Funds

Composite Management/Policies

Input Data and Portfolio Calculation

GIPS 2010 transition to GIPS 2020

Question – Is there a list of disclosures included in the 2020 edition of the GIPS standards for Firms that may be removed from GIPS Reports after one year? (October 2019 Newsletter)

Answer: The term “GIPS Report” includes GIPS Composite Reports and GIPS Pooled Fund Reports. A GIPS Composite Report is a presentation for a composite that contains all of the information required by the GIPS standards. A GIPS Pooled Fund Report is a presentation for a pooled fund that contains all of the information required by the GIPS standards. GIPS Reports may include recommended information and supplemental information. GIPS Reports may also include any other information that would help a reader interpret the GIPS Report, as long as the information is not false or misleading. The 2020 edition of the GIPS standards includes four sections for preparing GIPS Reports. Each section includes required and recommended numerical information, as well as required and recommended disclosures.

• Section 4–a GIPS Composite Report that includes time-weighted returns
• Section 5–a GIPS Composite Report that includes money-weighted returns
• Section 6–a GIPS Pooled Fund Report that includes time-weighted returns
• Section 7–a GIPS Pooled Fund Report that includes money-weighted returns.

The 2020 edition includes “sunset” provisions. These are disclosures that must be included for at least one year but may subsequently be deleted if the firm determines that they are no longer relevant to interpreting the track record. The Help Desk has received several questions asking for a list of which disclosures may be deleted with the passage of time. There are five disclosures that may be removed after one year. Here is the list, with corresponding provision numbers in parentheses:

1.  The firm must disclose all significant events that would help a prospective client interpret the GIPS Composite Report/GIPS Pooled Fund Report (4.C.19, 5.C.18, 6.C.16, and 7.C.16)
2.  The firm must disclose changes to the name of the composite/pooled fund (4.C.23, 5.C.22, 6.C.20, and 7.C.20)
3. The firm must disclose, for a retroactive benchmark change, the date and description of the change (4.C.32.b, 5.C.31.b, 6.C.27.b, and 7.C.27.b)
4. The firm must disclose any change to the GIPS Composite Report/GIPS Pooled Fund Report resulting from the correction of a material error (4.C.38, 5.C.37, 6.C.31, and 7.C.33)
5. If the firm changes the type of return(s) presented for the composite/pooled fund (e.g., changes from money-weighted returns to time-weighted returns, or vice versa), the firm must disclose the change and the date of the change (4.C.42, 5.C.40, 6.C.33, and 7.C.35)

Firms may also delete any disclosures that are no longer applicable for the periods presented. For example, assume a firm presents the most recent 10 years of annual calendar-year performance in its GIPS Reports. Assume also that a composite previously had a composite minimum, but the composite minimum was eliminated in June 2010. Provisions 4.C.24 and 5.C.23 require firms to disclose the composite minimum and any changes to the composite minimum. When preparing a GIPS Report that includes the periods from 2010 through 2019, the firm must include the composite minimum disclosure, because the track record included in the GIPS Report includes periods for which the composite minimum was in place. However, when the firm prepares the next annual update of the GIPS Report, it will include performance from 2011 through 2020. The composite minimum disclosure is no longer applicable to the periods that are presented in the GIPS Report, and the firm may remove this disclosure. Firms should take a fresh look at disclosures whenever GIPS Reports are updated, to ensure all disclosures are still necessary.

Question: My firm has claimed compliance with the GIPS standards for more than 10 years. We have not yet transitioned from claiming compliance with the 2010 edition of the GIPS standards to the 2020 edition of the GIPS standards. We understand that the 2020 edition has an effective date of 1 January 2020. What are we required to do as of this date? We manage private funds, and we plan to use GIPS Pooled Fund Reports for pooled-fund prospective investors, versus a GIPS Composite Report. When are we required to provide a GIPS Pooled Fund Report that is prepared in accordance with the 2020 edition to pooled-fund prospective investors? (January 2020 Newsletter)

Answer: The effective date for the 2020 edition of the GIPS standards is 1 January 2020. GIPS Composite Reports and GIPS Pooled Fund Reports that include performance for periods ending on or after 31 December 2020 must be prepared in accordance with the 2020 edition of the GIPS standards. Until the firm meets all applicable requirements of the 2020 edition on a firm-wide basis, it must continue to comply with the requirements of the 2010 edition. The firm will therefore continue to provide compliant presentations prepared in accordance with the 2010 edition to prospective clients until it includes performance for periods ending on or after 31 December 2020. At that point the firm must comply with the 2020 edition of the GIPS standards. The firm may also choose to adopt the 2020 edition early once it meets all applicable requirements.

Question: We received the following questions through the Help Desk asking about the effective date of 1 January 2020. First, can a firm early adopt the 2020 edition of the GIPS standards? (May 2020 Newsletter)

Answer: Yes, a firm can early adopt the 2020 edition of the GIPS standards. Second, if a firm can early adopt the 2020 edition of the GIPS standards, can a firm choose to early adopt only some of the provisions of the 2020 edition of the GIPS standards, as was allowed with the 2010 edition of the GIPS standards? The short answer is no. Once the 2020 edition of the GIPS standards is issued on 30 June 2019, firms may choose to early adopt this edition. If they choose to early adopt, they must comply with all applicable requirements and may not choose to adopt only selected requirements. The same is true for asset owners.

A firm or asset owner that currently complies with the GIPS standards and chooses not to early adopt the 2020 edition will need to prepare GIPS Reports in compliance with the 2020 edition of the GIPS standards when the GIPS Reports include performance for periods ending on or after 31 December 2020. Given that GIPS Reports that include time-weighted returns are required to include annual returns, this is the same as saying that GIPS Reports that include annual returns for periods beginning on or after 1 January 2020 must be prepared in accordance with the 2020 edition. You may be asking why we don’t just say that instead. If we only allowed time-weighted returns in GIPS Reports, we could say this. However, we also allow since-inception money-weighted returns to be presented in GIPS Reports, if certain criteria are met. For money-weighted returns, the effective date is determined based on the end date of the return that is presented. When we address the effective date for money-weighted returns, we need to refer to returns for periods ending on or after 31 December 2020. Therefore, we use the same effective date language for both time-weighted returns and money-weighted returns.

To illustrate the reporting requirements, assume a firm currently claims compliance and presents calendar year annual returns in GIPS Reports, and has chosen not to early-adopt the 2020 edition of the GIPS standards. When presenting performance through 31 December 2019 in 2020, the firm would follow the 2010 edition of the GIPS standards. When the firm includes performance through 31 December 2020 in 2021, it would be required to follow the 2020 edition of the GIPS standards.

Contrast this with an asset owner that currently claims compliance and presents annual returns in GIPS Asset Owner Reports for fiscal years ended 31 March. Let’s also assume that this asset owner updates GIPS Asset Owner Reports on a quarterly basis and has chosen not to early adopt the 2020 edition. When presenting annual performance through 31 March 2020, the asset owner would follow the 2010 edition of the GIPS standards. However, when the asset owner updates the GIPS Asset Owner Reports to include quarterly performance through 31 December 2020 it would be required to follow the 2020 edition of the GIPS standards. If we change our assumption such that the asset owner updates GIPS Asset Owner Reports annually, the asset owner would be required to follow the 2020 edition of the GIPS standards when it updates GIPS Asset Owner Reports to include annual performance through 31 March 2021.

In addition to reporting requirements, firms and asset owners will also need to consider changes included in the other sections of the GIPS standards, e.g., input data and calculation methodology. Some changes may need to be applied as of 1 January 2020. The final version of the 2020 edition of the GIPS standards will be issued on 30 June 2019. This gives firms and asset owners six months from the date the 2020 edition of the GIPS standards is issued to implement any needed changes outside of GIPS Reports.

Pooled Funds

Question: Our firm manages a pooled fund that has both retail and institutional share classes. The fund is not offered exclusively in one-on-one presentations; however, our typical marketing practice is to meet with prospective investors who have at least $10 million to invest in a single fund. Because we meet one-on-one with these prospective investors, is this pooled fund considered a broad or limited distribution pooled fund? Do we have to provide a GIPS Report to these prospective investors? (November 2019 Newsletter)

Answer: A broad distribution pooled fund is a pooled fund that is regulated under a framework that would permit the general public to purchase or hold the pooled fund  shares, and is not offered exclusively in one-on-one presentations. Because this fund has retail share classes, which means the general public may purchase shares, and it is not exclusively sold in one-on-one presentations, it meets both requirements for being classified as a broad distribution pooled fund. A pooled fund that has one or more retail share classes is classified as a broad distribution pooled fund even if its institutional share classes are offered exclusively in one-on-one presentations. The firm is not required to provide a GIPS Report to prospective investors for a broad distribution pooled fund, but may choose to do so.

Question: Our Emerging Market Composite includes segregated accounts and a limited partnership, which we classify as a limited distribution pooled fund. When we meet with a prospective investor for the partnership, what kind of GIPS Report are we required to provide? (November 2019 Newsletter)

Answer: When meeting with a prospective investor for the limited partnership, the firm is required to provide a GIPS Report. This GIPS Report may be either the GIPS Pooled Fund Report for the specific fund or the GIPS Composite Report that includes the fund. If presenting a GIPS Composite Report to a prospective investor for a pooled fund included in the composite, the firm must disclose the pooled fund’s current fee schedule and expense ratio that are appropriate to the prospective investor.

Question: We are the sub-advisor for several retail mutual funds. Other firms are the advisors of the mutual funds. As a sub-advisor, should we consider these sub-advised funds to be broad distribution pooled funds or segregated accounts? (November 2019 Newsletter)

Answer: If a firm is the sub-advisor for a pooled fund that is marketed or distributed by another firm, the firm acting as sub-advisor must treat the sub-advised pooled fund as a segregated account. All actual, fee-paying, discretionary segregated accounts must be included in at least one composite.

Question: We understand that under the 2020 GIPS standards, we will be able to terminate all of our single-fund composites (i.e., those composites that we created to include only a single fund). Is this a proper interpretation? (November 2019 Newsletter)

Answer: Firms must consider how composites that include only one or more pooled funds are used. The key question is whether the strategy of the composite that includes only one or more pooled funds is offered as a segregated account. Prior to the 2020 edition of the GIPS standards, firms were required to include all portfolios, both segregated accounts and pooled funds, in a composite. When a firm adopts the 2020 edition of the GIPS standards, it will no longer be required to include pooled funds in a composite unless the pooled fund has a strategy that is managed for or offered as a segregated account, or if the pooled fund meets a composite definition. Once a firm adopts the 2020 GIPS standards, any composites containing only one or more pooled funds whose strategy is not offered as a segregated account may be terminated. These terminated composites are not required to be included on the firm’s list of composite descriptions. This is a one-time exemption to the requirement that terminated composites must be included on a firm’s list of composite descriptions for five years after the composite termination date. This exemption applies only to those composites that contain only one or more pooled funds, and whose strategy is not managed for or not offered as a segregated account. If a composite that includes only one or more pooled funds is offered as a segregated account, then the composite must not be terminated, and it must be maintained.

Question: Our firm has a composite that includes two broad distribution pooled funds. To comply with the 2020 edition of the GIPS standards, we believe that we have to keep both pooled funds in the composite. When we prepare a GIPS Pooled Fund Report for these funds, do we include the performance of both funds? (August 2020 Newsletter)

Answer: If a firm manages or plans to offer the strategy of the broad distribution pooled funds as a segregated account, and the broad distribution pooled funds meet the composite definition, then the broad distribution pooled funds must be included in the composite (see Provision 3.A.3). If the firm does not manage or does not plan to offer the strategy of the broad distribution pooled funds as a segregated account, then there is no requirement to create a composite and include the broad distribution pooled funds in the composite, although the firm may do so if it wishes (see Provision 3.A.1). Also, firms are not required to create a GIPS Pooled Fund Report for broad distribution pooled fund prospective investors but may do so (see Provision 1.A.15). If the firm chooses to prepare a GIPS Pooled Fund Report for a broad distribution pooled fund, the report will include information only for the respective pooled fund.

Question: Provision 1.A.15 states that a firm may provide a GIPS Pooled Fund Report for a broad distribution pooled fund (BDPF) to prospective investors but is not required to do so. Our firm would like to prepare and provide GIPS Pooled Fund Reports for selected BDPFs. If we prepare and provide GIPS Pooled Fund Reports for some BDPFs, must we do so for all BDPFs? (September 2020 Newsletter)

Answer: Firms are not required to provide a GIPS Pooled Fund Report to BDPF prospective investors. Firms may choose which, if any, BDPFs to present in a GIPS Pooled Fund Report.

Composite Management/Policies

Question: In the 2020 GIPS standards, provision 3.A.1 states that the firm must create composites for the firm’s strategies that are managed for or offered as a segregated account. We maintain composites that include segregated accounts that we do not market. Because we do not actively offer or market these composites, may we terminate them? (November 2019 Newsletter)

Answer: No, firms may not terminate these composites. All actual, fee-paying, discretionary segregated accounts must be included in at least one composite. This is true whether or not the composite is marketed.

Question: Provision 3.A.15 states that any carve-out in a composite must include cash and any related income. Cash may be accounted for separately, or allocated synthetically. Provision 3.A.18 states that when the firm has or obtains standalone portfolios managed in the same strategy as the strategy of the carve-outs with allocated cash, the firm must create a separate composite for the standalone portfolios. We managed balanced accounts, consisting of equity and fixed-income components that are each traded and managed with their own cash balances. Cash is not allocated synthetically. Are we required to create composites with standalone portfolios? Also, can we include carve-outs that are managed with their own cash and standalone portfolios in the same composite? (February 2020 Newsletter)

Answer: A carve-out is a portion of a portfolio that is by itself representative of a distinct investment strategy. Carve-outs that are managed with their own cash are not considered standalone portfolios, nor are they subject to the requirements to create and report composites of standalone portfolios (provision 3.A.18). A standalone portfolio is a portfolio that is not a portion of a larger portfolio. Firms must create a composite of standalone portfolios only when a firm includes carve-outs with allocated cash in a composite. If a firm has carve-outs managed with their own cash, the firm may elect to include these carve-outs with their own cash in a composite if the carve-outs are representative of a standalone portfolio managed or intended to be managed according to that strategy, but is not required to do so. The composite may also include standalone portfolios, if the firm has or when the firm obtains standalone portfolios managed in that strategy. If the firm elects to not include the carve-outs with their own cash in composites, the firm must include the total portfolio in a composite to meet the requirement that all fee-paying, discretionary, segregated accounts are included in at least one composite. If the firm chooses to include a carve-out managed with its own cash in a composite, it must include all like carve-outs with their own cash in the composite.

Question: In the Explanation of the Provisions, Provision 3.A.5, the composite definition policies seem to suggest that individual composite definitions must be created. We know that composite descriptions must be created for individual composites. Rather than creating separate composite definitions for each composite, can some of the composite definition policies (e.g., account minimum) be included in a table of the firm’s policies and procedures, or may they appear in a policy that applies to all composites? Or, do we have to create individual composite definitions like we do for composite descriptions? (June 2020 Newsletter)

Answer: A composite description is defined as general information regarding the investment mandate, objective, or strategy of the composite. The composite description may be more abbreviated than the composite definition but 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, including:

• the material risks of the composite’s strategy.

• how leverage, derivatives, and short positions may be used, if they are a material part of the strategy.

• if illiquid investments are a material part of the strategy.

A composite definition is defined as detailed criteria that determine the assignment of portfolios to composites. Criteria may include, but are not limited to, investment mandates, style or strategy, asset class, the use of derivatives, leverage and/or hedging, targeted risk metrics, investment constraints or restrictions, and/or portfolio type (e.g., segregated account or pooled fund; taxable versus tax exempt). To differentiate between a composite definition and a composite description, it might be helpful to think of a composite description as focused on a description of the strategy represented by the composite. In contrast, a composite definition includes not only the composite strategy, as represented by the composite description, but also the detailed criteria that determine whether and when a portfolio is included in a composite. These additional criteria include such factors as the new portfolio inclusion policy as well as any policies regarding significant cash flows or minimum asset size that are applicable to the composite.

As long as the firm includes all elements of the composite definitions in its policies and procedures, the formatting is left to the firm. For example, if the firm uses account minimums, the firm can include a table in the policies and procedures that lists the account minimums for all composites that use these minimums. Firms are not required to create individual composite definitions for each composite, but they may do so. The Explanation of the Provisions for Provision 3.A.5 includes a table that firms can use to ensure that all required elements of composite descriptions and composite definitions are appropriately addressed in the firm’s policies and procedures.

Input Data and Portfolio Calculation

Question: Our firm manages pooled investment funds that apply swing pricing (i.e., the fund has two sets of net asset values per share (“NAVs”) – the “swung NAV” that includes a swing factor and the “unswung NAV” that corresponds to the valuation NAV). Assuming that performance is calculated on the basis of the NAV per share, which NAV should be used when calculating returns for the purpose of compliance with the GIPS standards? (July 2020 Newsletter)

Answer: The purpose of swing pricing in pooled investment funds is to provide protection to current fund shareholders against the negative dilution impact from transaction/trading costs occurring when a fund buys or sells securities as a result of external cash flows driven by fund shareholders (subscriptions and redemptions). This is achieved by transferring the estimated impact arising from transaction costs to those shareholders who subscribe or redeem fund shares. In principle, the fund’s tradable NAV is adjusted with a so-called swing factor so that the shareholders who subscribe buy shares at the swung NAV that is higher than the valuation or unswung NAV. Shareholders who redeem sell shares at the swung NAV that is lower than the valuation or unswung NAV.

The approach to swing pricing may vary depending on specific parameters, including the following:

• Dual pricing versus single pricing: Dual-priced funds calculate one price for subscribers and another price for redeemers, while single-priced funds calculate one single NAV per share that is used for all capital activity (both subscriptions and redemptions).
• Full swing versus partial swing:
  • For full-swing funds, the NAV is adjusted each time there is capital activity. The direction of the swing is determined by the net capital activity of the day (i.e., net inflow or outflow).
  • For partial-swing funds, the NAV is swung only on those days when a predetermined net capital activity threshold (the swing threshold) is exceeded. As with full swing, the direction of the swing is determined by the net capital activity of the day (i.e., net inflow or outflow). Partial swing is also referred to as semi-swing pricing.

In all cases, the size of the swing factor is determined by the size and direction of the capital flows. Typically, funds that apply swing pricing calculate two types of NAV per share—the “unswung” or “valuation” NAV and the “swung” NAV. Dual-priced funds will have three prices: the valuation NAV, the swung NAV for subscriptions, and the swung NAV for redemptions. Single-priced funds will have two prices: the valuation NAV and the swung NAV.

Performance Calculation for Pooled Funds That Apply Swing Pricing

Pooled funds may calculate their performance either on the basis of NAV per share or on the basis of the total fund portfolio taking into consideration external cash flows. Those pooled funds that calculate their performance on the basis of the NAV per share and apply swing pricing should consider the following advantages and disadvantages associated with using the swung NAV or the unswung NAV for performance calculation purposes:

Advantages of Swung NAV

• Best representation of investor return. More appropriate for investment performance reporting to current investors because the return of the fund is based on traded NAV.

Disadvantages of Swung NAV

• Introduces additional volatility and tracking error and reduces comparability against a benchmark (benchmark performance does not include swing factor impact).
• Reduces comparability against other investment managers as swing factors may be subjective and vary from manager to manager.

Advantages of Unswung NAV

• Best representation of manager return. Better comparability among investment managers. More appropriate for prospective investors.
• Return is more comparable to portfolios that are not pooled funds (i.e., segregated accounts) included in the same composite.
• Better comparability against benchmark (benchmark performance does not include swing factor impact).
• More appropriate as the basis for performance fees.

Disadvantages of Unswung NAV

• NAV is not a traded NAV that is available to investors for subscriptions/redemptions—performance does not fully correspond to the individual investor’s return.
• Unswung NAV may not be published or readily available.

For GIPS compliance purposes, firms are allowed to use either the swung or unswung NAV as the basis for the fund’s performance calculation. Because of the advantages just described, firms are recommended to use the unswung NAV. Firms must include policies and procedures with respect to the use of swing pricing in calculation and valuation policies and procedures and apply them consistently on a composite-specific or fundspecific basis. Firms must disclose that policies for valuing portfolios, calculating performance, and preparing GIPS Reports are available upon request. Some countries may have regulatory guidance in place with respect to the use of swing pricing for fund performance calculation purposes. Firms are reminded that they must comply with all applicable laws and regulations regarding the calculation and presentation of performance.

Question: We manage a hedge fund that is classified as a limited distribution pooled fund. Participants in the hedge fund may make contributions or withdrawals quarterly. Because the hedge fund allows cash flows quarterly, does this qualify as our firm controlling the cash flows so that we meet the first criterion for having the ability to present money-weighted returns instead of time-weighted returns in a GIPS Report? (November 2019 Newsletter)

Answer: No, this does not qualify as the firm controlling the cash flows. In this case, the investor controls when to make the contribution or withdrawal, but the investor can only make those cash flows at a specific time. When the firm controls the cash flows, the investor must provide the funds when the firm asks for them. Provision 1.A.35 requires firms to present time-weighted returns unless certain criteria are met, in which case the firm may present money-weighted returns. The first criterion that must be met is that the firm must have control over the external cash flows. The firm would not be considered to have control over the external cash flows when a limited distribution pooled fund has periodic openings and would therefore not be allowed to present money-weighted instead of time-weighted returns in a GIPS Report.