Global Investment Performance

Section: Global Investment Performance Standards (GIPS) Estimated study time: 45 minutes Content: The Global Investment Performance Standards (GIPS) are a set of ethical principles for investment firms covering how they calculate and present investment performance to prospective clients. Created and administered by CFA Institute, GIPS provide a globally consistent, standardized framework that allows investors to compare performance across firms and geographies on an apples-to-apples basis. GIPS are voluntary — firms are not legally required to claim compliance — but once a firm claims GIPS compliance, it must apply the standards to all of its composites and follow all applicable requirements. As of 2020, the GIPS standards were significantly revised to cover asset owners (e.g., pension funds) and to expand guidance for alternatives, overlay strategies, and pooled funds. A cornerstone of GIPS is the concept of the composite. A composite is a grouping of all discretionary portfolios managed according to the same investment mandate, objective, or strategy. For example, a firm running a large-cap value equity strategy for multiple clients must include all discretionary large-cap value accounts in a single composite — it cannot cherry-pick its best-performing accounts to show prospective clients. This anti-cherry-picking requirement is the central protection GIPS provides to investors. Composites must include all fee-paying, discretionary accounts, and firms must define composite criteria in advance (not retroactively based on performance). Non-discretionary accounts — where clients restrict the manager's investment decisions — are excluded from composites. GIPS imposes specific calculation and presentation requirements. Returns must be calculated using time-weighted rates of return (TWRR), which eliminate the distorting effect of client cash flows on performance measurement. For example, if a client deposits a large sum just before a market…