Discuss why firms seek GIPS verification, what it covers and how it is carried out
The idea
Verification is a review by an independent third party, carried out for the whole firm, that tests two things: whether the firm has met all the requirements for building and maintaining composites and pooled funds, and whether its policies and procedures for calculating and presenting performance are designed and applied in line with GIPS. It is recommended, not required, and must cover at least one year or since inception. The verifier tests the firm definition, total firm assets, composite definitions and membership, samples portfolios, recalculates returns and reviews records, then issues a verification report. Verification does not certify any single composite report; that is a performance examination, a separate optional engagement done only alongside or after verification. It adds credibility and tightens internal controls.
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- Discuss what the GIPS standards aim to achieve, whom they cover, and how they help investment managers as well as prospective clients and investors
- Explain the basic requirements for claiming GIPS compliance, including how the firm is defined and how it defines discretion
- Discuss the GIPS rules for calculating returns, covering how fees and expenses, cash and cash equivalents, and external cash flows are treated
- Explain the valuation hierarchy that the GIPS standards recommend
- Explain the GIPS rules for calculating composite returns, including the permitted ways of asset-weighting the returns of member portfolios
- Explain what makes a portfolio discretionary for composite construction and, from a set of facts, judge whether a given portfolio is likely to qualify
- Explain how composites are defined around a shared mandate, objective or strategy, and why this matters
- Explain the GIPS composite construction rules, covering when portfolios may move between composites, when new portfolios must be added and when terminated ones must be removed
- Explain what the GIPS standards require in presenting and reporting performance
- Explain when a new or acquiring firm may link to, or show as its own history, the performance record of a prior firm or affiliation