Best Practices for Creating and Maintaining Policies and ... - GIPS

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Example policy:All performance results are total returns, including both realized and unrealized gains andlosses plus income. Portfolio performance results are calculated on a monthly basis using theModified Dietz method. Sub-period calculations are performed during periods where largecash flows occur. Sub-period returns are geometrically linked to arrive at monthly,quarterly, and annual returns. Cash flows are assumed to occur at the beginning of the day.Returns for cash and cash equivalents held in portfolios are included in all returncalculations. All returns are calculated after the deduction of actual trading expensesincurred during the period. When applicable, performance is calculated net of nonreclaimablewithholding taxes on income and capital gains.Procedures to consider:• The firm’s procedures related to portfolio return calculations should address the systemsused and whether the calculations are performed internally or by an outside vendor. Notethat even if the firm has outsourced portfolio calculations, the firm is still responsible forthe accuracy of the calculations and for ensuring adherence to the GIPS standards. If athird-party is engaged to perform portfolio-level performance calculations, it is importantto review a sample of portfolios on a regular basis to verify the calculations.• Firms should consider establishing procedures to periodically compare portfolioperformance to composite performance to assist in identifying outliers that could indicatevaluation, cash flow, or calculation issues.Helpful hints:• It may be helpful to include formulas and definitions in the firm’s policies to explain themethodologies used, including indicating if any details have changed over time.• The firm’s policies should indicate how cash flows are treated (e.g., accounted for as ofthe beginning or end of day) and that a consistent methodology is applied.• Policies for converting returns into different currencies should also be outlined, ifapplicable.IX. Composite performance calculationsThe composite return is the asset-weighted average of the performance of all portfolios in thecomposite. Firms must document the methodologies used and the frequency for asset-weightingportfolio returns when calculating composite returns. Similar to the portfolio valuationrequirements, the GIPS standards have gradually increased the minimum required frequency forasset-weighting portfolio returns in order to calculate composite results. Quarterly compositeBest Practices for Creating and Maintaining GIPS Policies & Procedures Page 16
calculations are permitted for periods prior to January 1, 2010; subsequently, composite returnsmust be calculated at least monthly.Example policy:Composite returns are calculated on a monthly basis by asset-weighting portfolio returnsusing beginning of month valuations. Consistent beginning and ending valuation dates areused for all periods. Monthly composite performance results are geometrically linked toobtain quarterly and annual results.Procedures to consider:• The firm’s procedures related to composite performance calculations should address thesystems used, weighting methods (i.e., using beginning-of-period values or a method thatreflects both beginning-of-period values and external cash flows), and the frequency forwhich calculations are performed.Helpful hints:• Firms should understand and test the methodologies used to calculate compositeperformance, particularly if third-party systems or vendors are being utilized.• It may be helpful to include formulas and definitions to explain the methodologies used,including indicating if any details have changed over time.X. Treatment of feesA fee-paying portfolio incurs investment management fees, which are fees paid to the firm forthe management of the portfolio. These investment management fees are typically asset based (apercentage of assets), performance based (based on the performance of the portfolio on anabsolute basis or relative to a benchmark), or a combination of the two, but may take differentforms as well.The firm’s policies and procedures should describe the methods used to calculate gross-of-feesand net-of-fees performance results. The GIPS standards define gross-of-fees performance as thereturn on investments reduced by any trading expenses incurred during the period. Net-of-feesperformance is defined as the gross-of-fees return reduced by investment management fees(including performance-based fees and carried interest). The GIPS standards recommendpresenting gross-of-fees returns. If net-of-fees returns are presented, investment managementfees should be accrued.Refer to the Guidance Statement on Fees for additional information.Best Practices for Creating and Maintaining GIPS Policies & Procedures Page 17
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Best Practices for Creating and Maintaining Policies and ... - GIPS

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