australian investment performance standards (aips)
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AUSTRALIAN INVESTMENTPERFORMANCE STANDARDS
(AIPS)
the Australian Version of GIPSTM
(For Presentation of Investment Manager Performance)
Released as IFSA Guidance Note No. 1.00
AUSTRALIAN INVESTMENTPERFORMANCE STANDARDS
(AIPS)
the Australian Version of GIPSTM
Released as IFSA Guidance Note No. 1.00
Effective 01 July 2002
Refer to Section I.B for details on AIPS Compliance Dates
Australian Investment Performance StandardsEditorial Committee
Glenn Solomon, ChairCogent Investment Operations
James CutlerSchroder Investment Management
Angela KeaneQueensland Investment Corporation
Kris KondovInTech Financial Services
Sean RyanKPMG
Heather Ward
Andrew WilsonPricewaterhouseCoopers
The Editorial Committee would like to thank previous Committee and P Group members for theircontributions in developing and promoting the Australian Investment Performance Standards.
Foreword
We are pleased to present the Australian Investment Performance Standards, the Australian Version of theGlobal Investment Performance Standards (GIPSTM), effective from 1 July 2002. The Australian InvestmentPerformance Standards (AIPS) were originally introduced as the Australian Investment PerformanceMeasurement & Presentation Standards (AIPMPS) on 1 January 1998. In July 1999, the name changedfrom AIPMPS to AIPS when the Investment & Financial Services Association (IFSA) adopted AIPS as aGuidance Note (No.1) for its members.
AIPS have been released as a Country Version of GIPS (CVG) in recognition of the importance ofparticipating in a single, global standard. GIPS are the global performance standards that were developedby an international committee funded by the Association for Investment Management and Research (AIMR).Since being formally endorsed in 1999, GIPS have gained much recognition, with more than 25 countriesembracing the Standards.
The Australian Investment Performance Standards, the Australian Version of GIPSTM were formallyendorsed by the Investment Performance Council (IPC) as a CVG on 25 June 2002. The IPC is thegoverning body of GIPS. As part of the IPC endorsement conditions, the AIPS Editorial Committee hasmade an undertaking to ensure that AIPS are updated in line with any revisions to GIPS. The Australianindustry will be informed in the event that any changes are to be made.
GIPS, like the previous version of AIPS, are based on the underlying principles of fair representation and fulldisclosure, and are quite similar in many respects. The primary aim of the Standards is to ensure thatclients can readily compare the investment performance of fund managers through the application ofuniform valuation and calculation methodologies as well as the requirement of relevant disclosures. Thedifferences between AIPS and GIPS are listed in Section I.B Additional AIPS Specific Requirements andRecommendations.
An important feature of the AIPS CVG is the inclusion of a ‘right of access statement’ which enables firmswho are compliant with GIPS, Translations of GIPS or any other Country Versions of GIPS, fair and equalaccess to the Australian market without the need to specifically comply with the Australian Standard.Conversely, Australian firms who are compliant with the AIPS CVG also have equal access to other globalmarkets that use GIPS, Translations of GIPS or Country Versions of GIPS, without the need to comply withother performance standards.
AIPS have been developed for the benefit of all market participants. Investors, Trustees, InvestmentManagers, Asset Consultants and Custodians should all benefit from these Standards. Of course, thebenefits will be maximised once their adoption is widespread. We can all take part in increasing theadoption of AIPS by insisting that investment managers use the Standards and by educating other marketparticipants of the benefits of using the Standards.
Lastly, I would like to thank all members of the AIPS Editorial Committee, whose efforts ensured that thisversion was well researched. I would also like to thank those industry members who provided the much-valued feedback during the comment period.
Yours sincerely
Glenn SolomonChair, AIPS Editorial Committee
For more information on the Australian Investment Performance Standards, please visit theIFSA website (www.ifsa.com.au) and follow the links through to the P Group. The P Group
website contains a copy of AIPS, P Group Guidance Statements and details of P Groupactivities.
For more information on the Investment Performance Council or the Global InvestmentPerformance Standards, please visit the AIMR website (www.aimr.org) and follow the AIMRStandards link. AIMR also distribute a bi-monthly email detailing current events relating to
GIPS. To subscribe visit www.aimr.org/standards/pps/email_alert.html and follow theregistration instructions.
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AUSTRALIAN INVESTMENT PERFORMANCE STANDARDS (AIPS)
OUTLINE
Page
I. APPLICATION OF GIPS AT THE LOCAL LEVEL 2
A. Background 2B. Additional AIPS Specific Requirements and Recommendations 4C. Global Investment Performance Standards Introduction 8
II. CONTENT OF THE AUSTRALIAN INVESTMENT 14PERFORMANCE STANDARDS (AIPS)
A. Provisions of AIPS and GIPS 15B. Additional AIPS Provisions 16C. AIPS Interpretations, Clarifications and Guidance Statements 16
III. VERIFICATION 27
A. Scope and Purpose of Verification 27B. Required Verification Procedures 28C. Detailed Examinations of Investment Performance Presentations 32
APPENDICES 33
A. GIPS Sample Presentation 33B. AIPS Sample Presentation 34
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I. APPLICATION OF GIPS AT THE LOCAL LEVEL
A. BACKGROUND
Australian Standards
Widely accepted and recognised Investment Performance Standards were first introduced to theAustralian market in 1998, with the release of the Australian Investment PerformanceMeasurement & Presentation Standards (AIPMPS). In July 1999 these Standards wereadopted by the Investment & Financial Services Association (IFSA) and renamed as TheAustralian Investment Performance Standards (AIPS). These Standards were the predecessorto this current version, the Australian Investment Performance Standards, the AustralianVersion of GIPSTM.
The original Australian Standards were created as a result of the Insurance and SuperannuationCommission (ISC now Australian Prudential Regulatory Authority) Working Party which formeda Working Group to develop performance standards for Australia. The initial Working Grouphad representatives from the ISC, Australian Investment Managers Association (AIMA nowIFSA), the Institute of Actuaries and the Australian Custodial Services Association. Theobjective of the Working Group was to create standardised performance methodology inAustralia to alleviate the need for the ISC to regulate the industry with regard to performancemeasurement. The Working Group used the US based AIMR-Performance PresentationStandards (AIMR-PPS), which were released in 1987, as the basis for the Australian Standards.
Global Standards
The Global Investment Performance Standards (GIPS) were developed in recognition of theneed for a globally accepted standard, as many countries, such as Australia, had developedtheir own standards. Although these individual country standards contained many similarities,there were some significant differences. Further, the existence of several different standardsmeant that potential barriers to entry were created for investment management firms. TheAssociation for Investment Management and Research (AIMR) funded the development ofGIPS through the creation of the GIPS Committee. The GIPS Committee consisted of a groupof experts with diverse geographical representation, including a member from Australia. TheGIPS Committee worked to create a single standard that would be both recognised andaccepted globally.
Since the endorsement of GIPS in 1999, many countries have embraced GIPS. As of March2002, in excess of 25 countries have either already adopted GIPS (as GIPS, a Translation ofGIPS or a Country Version of GIPS), or are in the process of doing so.
Investment Performance Council
The GIPS Committee completed its work with the creation of the Global InvestmentPerformance Standards, which were officially endorsed by the AIMR Board of Governors in April1999. Following the endorsement and release of GIPS, the work of the GIPS Committee wasofficially finished, AIMR concluded that a new governing body was required to oversee GIPS.Consequently, AIMR formed The Investment Performance Council (IPC) which had its first
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meeting in March 2000. The IPC is represented by a diverse mix of professionals covering abroad spectrum of the industry, with geographic, industry and technical seats.
The IPC is responsible for the ongoing implementation, promotion, interpretation anddevelopment of GIPS. The IPC is also responsible for ensuring that the various Translations ofGIPS or Country Versions of GIPS conform to GIPS itself. Ultimately, the goal of the IPC is tohave all countries adopt GIPS as the standard for investment firms seeking to present historicalinvestment performance. It is hoped that in the future the only differences between CountryVersions of GIPS and GIPS will be those due to regulatory requirements.
It is the intention of the IPC to develop GIPS as quickly as is practicable into a “gold standard”,referred to by the IPC as “Gold GIPSTM”. Gold GIPS will in time incorporate many countriesbest practices into GIPS, ensuring GIPS remains relevant and reflective of world best practice.
Australian Investment Performance Standards as a Country Version of GIPSTM
As GIPS was not finalised until well after AIPMPS was released to the market, it was notpossible to consider GIPS as the standard for the Australian market at the time. Prior to therelease of this version of AIPS, there were essentially three competing standards in theAustralian market, AIPS, AIMR-PPS and GIPS itself. After considerable consultation with theAustralian industry, it was decided that Australia should participate in the GIPS framework anddevelop a Country Version of GIPS (CVG). Prior to the release of AIPS as a CVG, severalother countries had adopted the GIPS framework, making a compelling case to do the same.
By participating in the GIPS framework, barriers to entry are reduced, not the least by therecognition of a single standard. Firms are now able to compete alongside other firms who arecompliant with GIPS, Translations of GIPS or endorsed Country Versions of GIPS. This isestablished in paragraphs 21 and 22 of AIPS and all countries adopting GIPS. Theseparagraphs deal with the right of access for any GIPS compliant firm competing in othermarkets that have also adopted GIPS. The right of access statement in Paragraph 22 reads:
“A GIPS compliant firm is permitted to present its GIPS compliant investment performance inany market and should receive full consideration alongside an investment firm who claimscompliance with the Australian Investment Performance Standards (AIPS)”
It is important to note the reciprocity of this statement, as firms compliant with AIPS arepermitted to present their compliant investment performance in any other market that hasadopted GIPS, an endorsed Translation of GIPS or an endorsed Country Version of GIPS.
This version of the Australian Investment Performance Standards, the Australian Version ofGIPSTM, was officially endorsed by the Investment Performance Council as a Country Version ofGIPS in June 2002, and is effective from 1 July 2002. This aligns the Australian Standardsdirectly with GIPS.
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B. ADDITIONAL AIPS SPECIFIC REQUIREMENTS ANDRECOMMENDATIONS
Although AIPS incorporates all of the requirements and recommendations of GIPS, the followingadditional requirements and recommendations apply in Australia and must be followed inaddition to GIPS requirements in order to be fully compliant with AIPS.
Requirements
Input Data
1.A.3 Portfolios must be valued at least quarterly. For periods beginning January 1, 2001,portfolios must be valued at least monthly. For periods beginning January 1, 2010, it isanticipated that firms will be required to value portfolios on the date of any external cashflow. (AIPS recommends that portfolios be valued at least monthly. However, valuingportfolios on a daily basis is encouraged as it represents best practice – refer Section1.B.2.)
1.A.4 Firms must use trade-date accounting for periods beginning January 1, 2005. (AIPSrecommends the use of trade-date accounting – refer Section 1.B.3.)
1.A.5 Accrual accounting must be used for fixed income securities and all other assets thataccrue interest income. (AIPS recommends the use of accrual accounting for all markedto market investments, including dividends – refer Section 1.A.6 and Section 1.B.4.)
1.A.6 Accrual accounting must be used for dividends (as of the ex dividend date) for periodsbeginning January 1, 2005.
Calculation Methodology
2.A.2 Time-weighted rates of return that adjust for cash flows must be used. Periodic returnsmust be geometrically linked. Time-weighted rates of return that adjust for daily-weighted cash flows must be used for periods beginning January 1, 2005. Actualvaluations at the time of external cash flows will likely be required for periods beginningJanuary 1, 2010. (AIPS recommends that returns be calculated for periods of less thanor equal to one month with daily weightings of cash flows – refer Section 2.B.3.)
Disclosures
4.A.4 If settlement-date valuation is used by the firm. (AIPS recommends the use of trade-date accounting – refer Section 1.B.3.)
4.A.13 AIPS requires that firms disclose whether the presentation conforms with local laws andregulations that differ from AIPS requirements and the manner in which the localstandards conflict with AIPS. (GIPS requirement: Whether the presentation conformswith local laws and regulations that differ from GIPS requirements and the manner inwhich the local standards conflict with GIPS.)
4.A.14 The effective dates for compliance with AIPS are provided in the AIPS Introduction,Section I.B AIPS Compliance Dates. (GIPS requirement: For any performancepresented for periods prior to January 1, 2000, that does not comply with GIPS, the
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period of non-compliance and how the presentation is not in compliance with GIPS.)
4.A.16 AIPS requires the disclosure of the calculation method used by the firm - refer Section4.B.2.
Presentation and Reporting
5.A.1 (e) AIPS requires firms to use the approved AIPS Compliance Statement provided in theAIPS Introduction, Section I.B AIPS Claim of Compliance, indicating firmwidecompliance with AIPS. (GIPS requirement: The standard Compliance Statementindicating firmwide compliance with GIPS.)
5.A.2 The effective dates for compliance with AIPS are provided in the AIPS Introduction,Section I.B AIPS Compliance Dates. (GIPS requirement: Firms may link non-GIPScompliant performance to their compliant history, so long as firms meet the disclosurerequirements of Section 4 and no non-compliant performance is presented for periodsafter January 1, 2000. (For example, a firm that has been in existence since 1990 thatwants to present its entire performance history and claim compliance as of January 1,2000, must present performance history that meets the requirements of GIPS at leastfrom January 1, 1995, and must meet the disclosure requirements of Section 4 for anynon-compliant history prior to January 1, 1995.))
Recommendations
Disclosures
4.B.6 AIPS recommends that a disclosure should be made when a change in a pricing formulaor valuation model has a material impact on the performance or leverage of a portfolio.
Additional AIPS Provisions
The full content of GIPS has been incorporated into the Australian Version of GIPS (withadditional or modified provisions in italics). The GIPS sections cover the five basic elementsinvolved in presenting performance information: Input Data, Calculation Methodology,Composite Construction, Disclosures and Presentation and Reporting. AIPS also incorporatestwo additional sections covering the areas of Real Estate and Development Capital (Ventureand Private Placements). These provisions have been sourced from the Australian InvestmentPerformance Standards (July 1999) and will be updated in accordance with any provisions orguidance statements that are issued by the Investment Performance Council (IPC) with respectto GIPS.
AIPS Interpretations, Clarifications and Guidance Statements
As AIPS have been endorsed by the IPC as a Country Version of GIPS, all interpretations,clarifications, guidance statements and GIPS provisions (which represent the core of AIPS) thatare issued by the IPC will also apply to AIPS. Any such IPC releases will immediatelysupersede an AIPS specific equivalent and must be adhered to in order to maintain compliancewith AIPS. The AIPS Editorial Committee will be responsible for providing interpretations and/orclarifications for those AIPS provisions that are not included in GIPS and therefore, specific toAustralia.
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From time to time, the AIPS Editorial Committee will also release guidance statements thatrelate specifically to Australia, e.g., After-Tax Performance Measurement. Guidance statementsissued by the AIPS Editorial Committee are not required to be complied with. However, it isrecommended that firms adopt the provisions incorporated in these releases, as they will oftenreflect best practice within Australia. Where firms elect to comply with a guidance statementissued by the AIPS Editorial Committee, they are required under AIPS to disclose whether fullcompliance has been achieved. If firms have not fully complied, they must specify anydeviations that have been made from the requirements of the guidance statement.
To assist those using AIPS, any such information issued by the IPC relating to GIPS will beavailable on the AIMR web-site (www.aimr.org/standards/), whilst information relating to anyspecific Australian provisions will be available on the P Group web-site (www.ifsa.com.au).
Verification
Under the previous version of AIPS (July 1999), the verification process consisted of two levels.Level I Verification required an independent attestation that the requirements of AIPS had beenmet on a firmwide basis. It required the examination of the firms composite constructionprocedures and the firms procedures for calculating returns and presenting results. Level IIVerification required the examination of specific composite performance construction,calculation and presentation.
The revised AIPS, the Australian Version of GIPS, has adopted the full verification proceduresof GIPS. Instead of two verification levels, a single level verification will now be conducted inrespect of the whole firm, as a GIPS verification cannot be carried out for a single composite.
Verification will now test whether the;(a) firm has complied with all the composite construction requirements of GIPS/AIPS on a
firmwide basis, and(b) firms processes and procedures are designed to calculate and present performance results
in compliance with GIPS/AIPS.
However, this does not preclude firms from electing to have a more extensive performance auditof a specific composite presentation undertaken. Although, this will not enable a firm to claimcompliance with GIPS, as GIPS relates only to firmwide verification.
Also under AIPS (July 1999), a verifier was able to issue a qualified verification report for usewith a firms performance presentation, where the verifier believed that the firms non-compliancewith AIPS would not lead to a material difference in the firms presentation.
However, this is not possible under the revised version of AIPS. Where a verifier concludes thata firm is not in compliance with AIPS or that the firms records cannot support a completeverification, the verifier must issue a statement to the firm clarifying why the issue of averification report was not possible.
Although verification is not mandatory under AIPS, it is strongly encouraged so that it can beestablished whether a firm claiming compliance with AIPS has actually adhered to theStandards. Verification is expected to become mandatory (but no earlier than 2005).
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AIPS Claim of Compliance
Firms in compliance with AIPS must use the following claim of compliance within a performancepresentation:
[Name of Firm] has prepared and presented this report in compliance with the AustralianInvestment Performance Standards (AIPS), the Australian Version of the Global InvestmentPerformance Standards (GIPSTM).
AIPS Compliance Dates
The Australian Investment Performance Standards (AIPS), the Australian Version of GIPSTM areeffective from July 1 2002. This version of AIPS will replace the current version (July 1999) andwill apply to any performance presentations created on or after July 1 2002.
In accordance with the “Right of Access” provision, firms that meet the requirements of AIPSafter July 1 2002, will be able to present their investment performance in any market and shouldreceive full consideration alongside an investment firm that claims compliance with GIPS.
Investment Performance Council (IPC) Requirements of Endorsed Country Versions ofGIPS
The sponsor of AIPS is the Performance Analyst Group (P Group) AIPS Editorial Committee.When AIPS is endorsed by the Investment Performance Council (IPC), there are a number ofrequirements that must be adhered to.
The sponsor must confirm its acceptance of the need to maintain compatibility between AIPSand GIPS by modifying AIPS to incorporate any future GIPS additions or modifications by (atleast) the appropriate GIPS effective date.
Sponsors must also embrace the “Right of Access” principle which enables all investment firmsthat are GIPS compliant to compete equally in the Australian market with firms who are AIPScompliant. This is designed to minimise barriers to entry and promote global competitionamongst investment managers. This has been facilitated via the inclusion of the “Right ofAccess” statement in Section I.C.I.22.
The sponsor is also required to embrace and abide by all GIPS interpretations issued by theIPC Interpretations Subcommittee. These are located in a centralised GIPS interpretationsdatabase.
AIPS Sample Presentation
An AIPS sample presentation has been included in Appendix B to provide further clarificationand guidance to firms preparing AIPS compliant presentations.
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C. GLOBAL INVESTMENT PERFORMANCE STANDARDSINTRODUCTION
I. INTRODUCTION
PREAMBLE: WHY IS A GLOBAL STANDARD NEEDED?
1. The financial markets and the investment management industry are becoming increasinglyglobal in nature. Given the variety of financial entities and countries involved, thisglobalization of the investment process and the exponential growth of assets undermanagement demonstrate the need to standardize the calculation and presentation ofinvestment performance.
2. Prospective clients and asset managers will benefit from an established standard forinvestment performance measurement and presentation that is recognized worldwide.Investment practices, regulation, performance measurement, and reporting of performanceresults vary considerably from country to country. Some countries have guidelines that arewidely accepted within their borders, and others have few recognized standards forpresenting investment performance.
3. Requiring investment managers to adhere to performance presentation standards will helpassure investors that the performance information is both complete and fairly presented.Firms in countries with minimal presentation standards will be able to compete for businesson an equal footing with firms from countries with more developed standards. Firms fromcountries with established practices will have more confidence of being fairly compared to“local” firms when competing for business in countries that have not previously adoptedperformance standards.
4. Both prospective and existing clients of investment firms will benefit from a globalinvestment performance standard by having a greater degree of confidence in theperformance numbers presented by the firms. Performance standards that are accepted inall countries enable all investment firms to measure and present their investmentperformance so that clients can readily compare investment performance among firms.
VISION STATEMENT
5. A global investment performance standard leads to readily accepted presentations ofinvestment performance that (1) present performance results which are readilycomparable among investment managers, without regard to geographic location, and(2) facilitate a dialogue between investment managers and their prospective clientsabout the critical issues of how the manager achieved performance results and futureinvestment strategies.
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OBJECTIVES
6. To obtain worldwide acceptance of a standard for the calculation and presentation ofinvestment performance in a fair, comparable format that provides full disclosure.
7. To ensure accurate and consistent investment performance data for reporting, recordkeeping, marketing, and presentation.
8. To promote fair, global competition among investment firms for all markets without creatingbarriers to entry for new firms.
9. To foster the notion of industry “self-regulation” on a global basis.
OVERVIEW
10. The "Global Investment Performance Standards" (GIPS) have several key characteristics:
a. GIPS are ethical standards for investment performance presentation to ensure fairrepresentation and full disclosure of an investment manager’s performance.
b. GIPS exist as a minimum worldwide standard where local or country-specific law,
regulation, or industry standards may not exist for investment performancemeasurement and/or presentation.
c. GIPS require managers to include all actual fee-paying, discretionary portfolios in
composites defined according to similar strategy and/or investment objective and requirefirms to show GIPS compliant history for a minimum of 5 years, or since inception of thefirm or composite if in existence less than 5 years.
d. GIPS require firms to use certain calculation and presentation methods and to make
certain disclosures along with the performance record.
e. GIPS rely on the integrity of input data. The accuracy of input data is critical to theaccuracy of the performance presentation. For example, benchmarks and compositesshould be created/selected on an ex ante basis, not after the fact.
f. GIPS consist of guidelines that firms are required to follow in order to claim compliance.
The adoption of other elements of GIPS is recommended for firms to achieve bestpractice in performance presentation.
g. GIPS apply to the presentation of investment performance of assets managed on behalf
of a third party. h. GIPS should be applied with the goal of full disclosure and fair representation of
investment performance. Meeting the objective of full and fair disclosure is likely torequire more than compliance with the minimum requirements of GIPS. If an investmentfirm applies GIPS in a performance situation that is not addressed specifically by theStandards or is open to interpretation, disclosures other than those required by GIPS
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may be necessary. To fully explain the performance included in a presentation, firmsare encouraged to present all relevant supplemental information.
i. In cases in which applicable local or country-specific law or regulation conflicts with
GIPS, the Standards require firms to comply with the local law or regulation and makefull disclosure of the conflict.
j. GIPS do not address every aspect of performance measurement, valuation, attribution,
or coverage of all asset classes. GIPS will evolve over time to address additionalaspects of investment performance. Certain recommended elements in GIPS maybecome requirements in the future.
SCOPE
11. Application of GIPS. Investment management firms from any country may come intocompliance with GIPS. Compliance with GIPS will facilitate a firm’s participation in theinvestment management industry on a global level.
12. Definition of a Firm. GIPS must be applied on a firmwide basis. A firm may define itselfas:
a. an entity registered with the appropriate national regulatory authority overseeing the
entity’s investment management activities; or b. an investment firm, subsidiary, or division held out to clients or potential clients as a
distinct business unit (e.g., a subsidiary firm or distinct business unit managing privateclient assets may claim compliance for itself without its parent organization being incompliance);
c. (until January 1, 2005), all assets managed to one or more base currencies (for firmsmanaging global assets).
When presenting investment performance in compliance with GIPS, an investmentmanagement firm must state how it defines itself as a “firm.”
13. Historical Performance Record.
a. A firm is required to present, at a minimum, 5 years of annual investment performancethat is compliant with GIPS. If the firm or composite has been in existence less than fiveyears, firms must present performance since the inception of the firm or composite.
b. After a firm presents five years of compliant history, firms must present additional annual
performance up to ten years. For example, after a firm presents five years of complianthistory, the firm must add an additional year of performance each year so that after fiveyears of claiming compliance, the firm presents a ten year performance record.
c. A firm may link a non-GIPS-compliant performance record to their compliant history, solong as no non-compliant performance is presented for periods after January 1, 2000,and the firm discloses the periods of non-compliance and explains how the presentation
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is not in compliance with GIPS. In accordance with the right of access provision, firmsthat meet the requirements of AIPS after July 1 2002 will also meet all the requirementsof GIPS, and can therefore also claim compliance with GIPS. However, if anyperformance presented for periods prior to 1 January 2000 is not GIPS compliant, firmsmust disclose the period of non-compliance and the manner in which the local standardsconflict with GIPS.
Nothing in this section shall prevent firms from immediately presenting more than five yearsof performance results.
COMPLIANCE
14. Requirements. Firms must meet all the requirements set forth in GIPS to claim compliancewith GIPS. Although GIPS requirements must be met immediately by a firm claimingcompliance, the following requirements do not go into effect until a future date:
a. Portfolios must be valued at least monthly for periods beginning January 1, 2001. (AIPSrecommends that portfolios be valued at least monthly.)
b. Time-weighted rates of return adjusted for cash flows are required. Firms must usetime- weighted rates of return adjusted for daily-weighted cash flows for periodsbeginning January 1, 2005. (AIPS recommends that returns be calculated for periods ofless than or equal to one month with daily weightings of cashflows.)
c. For periods beginning January 1, 2010, firms will likely be required to value portfolios onthe date of any external cash flow.
d. Firms must use trade-date accounting for periods beginning January 1, 2005. (AIPSrecommends the use of trade-date accounting.)
e. Accrual accounting must be used for dividends (as of the ex dividend date) for periodsbeginning January 1, 2005. (AIPS recommends the use of accrual accounting for allmarked to market investments, including dividends.)
Until these future requirements become effective, these provisions should be consideredrecommendations. Firms are encouraged to implement these requirements prior to theireffective date. To ease compliance with GIPS when the future requirements take effect,firms should design performance software to incorporate these future requirements.
15. Compliance Check. Firms must take all steps necessary to ensure that they have satisfiedall of the requirements of GIPS before claiming compliance with GIPS. Firms are stronglyencouraged to perform periodic internal compliance checks and implement adequatebusiness controls on all stages of the investment performance process - from data input topresentation material - to ensure the validity of compliance claims.
16. Third-party Performance Measurement and Composite Construction. GIPS recognizethe role of independent third-party performance measurers and the value they can add tothe firm's performance-measurement activities. Where third-party performancemeasurement is an established practice or is available, firms are encouraged to use thisservice as it applies to the investment firm. Similarly, where the practice is to allow third
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parties to construct composites for investment firms, firms can use such composites in aGIPS-compliant presentation only if the composites comply with GIPS.
17. Claim of Compliance. Once a firm has met all of the required elements of GIPS, the firmmay use the following "Compliance Statement" to indicate that the performance presentationis in compliance with GIPS:
(Insert name of firm) has prepared and presented this report in compliance with theGlobal Investment Performance Standards (GIPS).
Firms in compliance with AIPS must use the following claim of compliance within aperformance presentation:
[Name of Firm] has prepared and presented this report in compliance with the AustralianInvestment Performance Standards (AIPS), the Australian Version of the Global InvestmentPerformance Standards (GIPSTM).
If the performance presentation does not meet all of the requirements of GIPS, firms cannotrepresent that the performance presentation is “in compliance with the Global InvestmentPerformance Standard except for...” Statements referring to the calculation methodologyused in a presentation as being “in accordance (or compliance) with the Global InvestmentPerformance Standards” are prohibited except when applied to the performance of a single,existing client.
18. Sample Presentation. A sample GIPS presentation, shown in Appendix A, provides anexample of what a compliant performance presentation could look like, includingdisclosures.
RELATIONSHIP OF GIPS WITH COUNTRY-SPECIFIC LAWS, REGULATIONS, ANDINDUSTRY STANDARDS
19. GIPS fill the void where no country standards exist. Regulators and investmentorganizations worldwide are strongly encouraged to recognize and adopt GIPS as theperformance presentation standard applicable to their constituencies. If there is a need forcountry-specific guidelines that go beyond GIPS, regulators and organizations areencouraged to develop and implement such guidelines to augment, but not conflict with,GIPS. Regulators are urged to supervise country compliance with GIPS and any country-specific standards that may exist.
20. Where existing laws, regulations, or industry standards already impose performancepresentation standards, firms are strongly encouraged to comply with GIPS in addition tothose local requirements. Compliance with applicable law or regulation does not necessarilylead to compliance with GIPS. When complying with GIPS and local law or regulation, firmsmust disclose any local laws and regulations that conflict with GIPS. AIPS require that firmsdisclose whether the presentation conforms with local laws and regulations that differ fromAIPS requirements and the manner in which the local standards conflict with AIPS.
21. The establishment of GIPS will minimize the complexities that result with the existingcontingent reciprocity agreements among organizations with their own standards.Organizations are encouraged to recognize GIPS rather than establish “country-to-country”
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reciprocity agreements for country-specific standards. When a country or group establisheslocal performance presentation standards, such standards should incorporate all of therequired elements of GIPS and state that compliance with GIPS is equivalent to compliancewith the local standards.
22. All CVG’s must embrace the “Right of Access” principle which enables all investment firmsthat are GIPS compliant to compete equally in the Australian market with firms who areAIPS compliant. By minimising potential barriers to entry, this provision aims at promotingglobal competition.
Right of Access Statement:
“A GIPS compliant firm is permitted to present its GIPS compliant investment performance inany market and should receive full consideration alongside an investment firm who claimscompliance with the Australian Investment Performance Standards (AIPS).”
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II. CONTENT OF THE AUSTRALIAN INVESTMENT PERFORMANCESTANDARDS (AIPS)
OUTLINE
A. Provisions of AIPS and GIPS
1. Input Data2. Calculation Methodology3. Composite Construction4. Disclosures5. Presentation and Reporting
B. Additional AIPS Provisions
6. Real Estate7. Development Capital (Venture and Private Placements)
C. AIPS Interpretations, Clarifications and Guidance Statements
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A. Provisions of AIPS and GIPS
All GIPS provisions are applicable to AIPS. Any additional provisions to GIPS are indicated initalics.
GIPS is divided into five sections that reflect the basic elements involved in presentingperformance information: Input Data, Calculation Methodology, Composite Construction,Disclosures, and Presentation and Reporting.
1. Input Data: Consistency of input data is critical to effective compliance with GIPS andestablishes the foundation for full, fair, and comparable investment performance presentations.The Standards provide the blueprint for a firm to follow in constructing this foundation.
2. Calculation Methodology: Achieving comparability among investment management firms’performance presentations requires uniformity in methods used to calculate returns. TheStandards mandate the use of certain calculation methodologies (e.g., performance must becalculated using a time-weighted total rate of return method).
3. Composite Construction: A composite is an aggregation of a number of portfolios into asingle group that represents a particular investment objective or strategy. The composite returnis the asset-weighted average of the performance results of all the portfolios in the composite.Creating meaningful, asset-weighted composites is critical to the fair presentation, consistency,and comparability of results over time and among firms.
4. Disclosures: Disclosures allow firms to elaborate on the raw numbers provided in thepresentation and give the end user of the presentation the proper context in which tounderstand the performance results. To comply with GIPS, firms must disclose certaininformation about their performance presentation and the calculation methodology adopted bythe firm. Although some disclosures are required of all firms, others are specific to certaincircumstances, and thus may not be applicable in all situations.
5. Presentation and Reporting: After constructing the composites, gathering the input data,calculating returns, and determining the necessary disclosures, the firm must incorporate thisinformation in presentations based on the guidelines set out in GIPS for presenting theinvestment performance results. No finite set of guidelines can cover all potential situations oranticipate future developments in investment industry structure, technology, products orpractices. When appropriate, firms have the responsibility to include in GIPS compliantpresentations information not covered by the Standards.
The standards for each section are divided between requirements, listed first in each section,and recommended guidelines. Firms must follow the required elements of GIPS to claimcompliance with GIPS. Firms are strongly encouraged to adopt and implement therecommendations to ensure that the firm fully adheres to the spirit and intent of GIPS. Anexample of a GIPS compliant presentation for a single composite is included as Appendix A.
Although GIPS may be translated into many languages, if a discrepancy arises between thedifferent versions of the standards, the English version of GIPS is controlling.
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B. Additional AIPS Provisions
The following two sections contain additional AIPS requirements and recommendationscovering the areas of Real Estate and Development Capital (Venture and Private Placements).These provisions have been sourced from the Australian Investment Performance Standards(July 1999).
The IPC is currently formulating provisions covering both Real Estate and Venture Capital whichwill replace the existing AIPS provisions on Real Estate and Development Capital. Provisionsreleased by the IPC will be released to the public in draft format (open for comment) beforebeing formally approved by the IPC and included as GIPS provisions. When these provisions(or any other provision such as; fees, verification, derivatives etc) are released by the IPC theywill become a requirement that must be met in order to claim compliance with both GIPS andAIPS.
6. Real EstateDue to the nature of real estate investments, such as the need for periodic independentappraisals, it is necessary to incorporate additional requirements and recommendationsaddressing the calculation and presentation of performance returns for these assets.
7. Development Capital (Venture and Private Placements)These requirements and recommendations were originally incorporated into AIPS to provideadditional clarification and guidance for firms that were required to calculate and presentperformance returns for development capital assets. These provisions have remained,reflecting their relevance in an industry where the instances of firms investing in such assets isincreasing.
C. AIPS Interpretations, Clarifications and Guidance Statements
As AIPS have been endorsed by the IPC as a Country Version of GIPS, all interpretations,clarifications, guidance statements and GIPS provisions (which represent the core of AIPS) thatare issued by the IPC will also apply to AIPS. Any such IPC releases will immediatelysupersede an AIPS specific equivalent and must be adhered to in order to maintain compliancewith AIPS. The AIPS Editorial Committee will be responsible for providing interpretations and/orclarifications for those AIPS provisions that are not included in GIPS and therefore, specific toAustralia.
From time to time, the AIPS Editorial Committee will also release guidance statements thatrelate specifically to Australia, e.g., After-Tax Performance Measurement. Guidance statementsissued by the AIPS Editorial Committee are not required to be complied with. However, it isrecommended that firms adopt the provisions incorporated in these releases, as they will oftenreflect best practice within Australia. Where firms elect to comply with a guidance statementissued by the AIPS Editorial Committee, they are required under AIPS to disclose whether fullcompliance has been achieved. If firms have not fully complied, they must specify anydeviations that have been made from the requirements of the guidance statement.
To assist those using AIPS, any such information issued by the IPC relating to GIPS will beavailable on the AIMR web-site (www.aimr.org/standards/), whilst information relating to anyspecific Australian provisions will be available on the P Group web-site (www.ifsa.com.au).
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1. Input Data
1.A Requirements
1.A.1 All data and information necessary to support a firm’s performance presentationand to perform the required calculations must be captured and maintained.
1.A.2 Portfolio valuations must be based on market values (not cost basis or bookvalues).
1.A.3 Portfolios must be valued at least quarterly. For periods beginning January 1,2001, portfolios must be valued at least monthly. For periods beginning January1, 2010, it is anticipated that firms will be required to value portfolios on the dateof any external cash flow. (AIPS recommends that portfolios be valued at leastmonthly. However, valuing portfolios on a daily basis is encouraged as itrepresents best practice – refer Section 1.B.2.)
1.A.4 Firms must use trade-date accounting for periods beginning January 1, 2005.(AIPS recommends the use of trade-date accounting – refer Section 1.B.3.)
1.A.5 Accrual accounting must be used for fixed income securities and all other assetsthat accrue interest income. (AIPS recommends the use of accrual accountingfor all marked to market investments, including dividends – refer Section 1.A.6and Section 1.B.4.)
1.A.6 Accrual accounting must be used for dividends (as of the ex dividend date) forperiods beginning January 1, 2005.
1.B Recommendations
1.B.1 Sources of exchange rates should be the same between the composite and abenchmark.
1.B.2 AIPS recommends that portfolios be valued at least monthly. However, valuingportfolios on a daily basis is encouraged as it represents best practice – referSection 1.A.3.
1.B.3 AIPS recommends the use of trade-date accounting – refer Section 1.A.4.
1.B.4 AIPS recommends the use of accrual accounting for all marked to marketinvestments, including dividends – refer Section 1.A.5 and Section 1.A.6.
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2. Calculation Methodology
2.A Requirements
2.A.1 Total return, including realized and unrealized gains plus income, must be used.
2.A.2 Time-weighted rates of return that adjust for cash flows must be used. Periodicreturns must be geometrically linked. Time-weighted rates of return that adjustfor daily-weighted cash flows must be used for periods beginning January 1,2005. Actual valuations at the time of external cash flows will likely be requiredfor periods beginning January 1, 2010. (AIPS recommends that returns becalculated for periods of less than or equal to one month with daily weightings ofcash flows – refer Section 2.B.3.)
2.A.3 In both the numerator and the denominator, the market values of fixed incomesecurities must include accrued income.
2.A.4 Composites must be asset-weighted using beginning-of-period weightings oranother method that reflects both beginning market value and cash flows.
2.A.5 Returns from cash and cash equivalents held in portfolios must be included intotal return calculations.
2.A.6 Performance must be calculated after the deduction of all trading expenses.
2.A.7 If a firm sets a minimum asset level for portfolios to be included in a composite,no portfolios below that asset level can be included in that composite.
2.B Recommendations
2.B.1 Returns should be calculated net of non-reclaimable withholding taxes ondividends, interest, and capital gains. Reclaimable withholding taxes should beaccrued.
2.B.2 Performance adjustments for external cash flows should be treated in aconsistent manner. Significant cash flows (i.e., 10% of the portfolio or greater)that distort performance (i.e., plus or minus 0.2% for the period) may requireportfolio revaluation on the date of the cash flow (or after investment) and thegeometric linking of subperiods. Actual valuations at the time of external cashflows will likely be required for periods beginning January 1, 2010.
2.B.3 AIPS recommends that returns be calculated for periods of less than or equal toone month with daily weightings of cash flows – refer Section 2.A.2.
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3. Composite Construction
3.A Requirements
3.A.1 All actual, fee-paying, discretionary portfolios must be included in at least onecomposite.
3.A.2 Firm composites must be defined according to similar investment objectivesand/or strategies.
3.A.3 Composites must include new portfolios on a timely and consistent basis afterthe portfolio comes under management - unless specifically mandated by theclient.
3.A.4 Terminated portfolios must be included in the historical record of the appropriatecomposites up to the last full measurement period that the portfolio was undermanagement.
3.A.5 Portfolios must not be switched from one composite to another unlessdocumented changes in client guidelines or the redefinition of the compositemake switching appropriate. The historical record of the portfolio must remainwith the appropriate composite.
3.A.6 Convertible and other hybrid securities must be treated consistently across timeand within composites.
3.A.7 Carve-out returns excluding cash cannot be used to create a stand-alonecomposite. When a single asset class is carved out of a multiple-asset portfolioand the returns are presented as part of a single-asset composite, cash must beallocated to the carve-out returns and the allocation method must be disclosed.Beginning January 1, 2005, carve-out returns must not be included in singleasset class composite returns unless the carve-outs are actually managedseparately with their own cash allocations.
3.A.8 Composites must include only assets under management and may not linksimulated or model portfolios with actual performance.
3.B Recommendations
3.B.1 Separate composites should be created to reflect different levels of allowed assetexposure.
3.B.2 Unless the use of hedging is negligible, portfolios that allow the use of hedgingshould be included in different composites from those that do not.
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4. Disclosures
4.A Requirements
The following disclosures are mandatory:
4.A.1 The definition of "firm" used to determine the firm's total assets and firmwidecompliance.
4.A.2 Total firm assets for each period.
4.A.3 The availability of a complete list and description of all of the firm's composites.
4.A.4 If settlement-date valuation is used by the firm. (AIPS recommends the use oftrade-date accounting – refer Section 1.B.3.)
4.A.5 The minimum asset level, if any, below which portfolios are not included in acomposite.
4.A.6 The currency used to express performance.
4.A.7 The presence, use and extent of leverage or derivatives, including a descriptionof the use, frequency and characteristics of the instruments sufficient to identifyrisks.
4.A.8 Whether performance results are calculated gross or net of investmentmanagement fees and other fees paid by the clients to the firm or to the firm’saffiliates.
4.A.9 Relevant details of the treatment of withholding tax on dividends, interest incomeand capital gains. If using indexes that are net of taxes, firms must disclose thetax basis of the composite (e.g., Luxembourg based or U.S. based) versus that ofthe benchmark.
4.A.10 For composites managed against specific benchmarks, the percentage of thecomposites invested in countries or regions not included in the benchmark.
4.A.11 Any known inconsistencies between the chosen source of exchange rates andthose of the benchmark must be described and presented.
4.A.12 Whether the firm has included any non-fee-paying portfolios in composites andthe percentage of composite assets that are non-fee-paying portfolios.
4.A.13 AIPS requires that firms disclose whether the presentation conforms with locallaws and regulations that differ from AIPS requirements and the manner in whichthe local standards conflict with AIPS. (GIPS requirement: Whether thepresentation conforms with local laws and regulations that differ from GIPSrequirements and the manner in which the local standards conflict with GIPS.)
4.A.14 The effective dates for compliance with AIPS are provided in the AIPSIntroduction, Section I.B AIPS Compliance Dates. (GIPS requirement: For any
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performance presented for periods prior to January 1, 2000, that does not complywith GIPS, the period of non-compliance and how the presentation is not incompliance with GIPS.)
4.A.15 When a single asset class is carved out of a multiple-asset portfolio and thereturns are presented as part of a single-asset composite, the method used toallocate cash to the carve-out returns.
4.A.16 AIPS requires the disclosure of the calculation method used by the firm - referSection 4.B.2.
4.B Recommendations
The following Disclosures are recommended:
4.B.1 The portfolio valuation sources and methods used by the firm.
4.B.2 AIPS requires the disclosure of the calculation method used by the firm – referSection 4.A.16. (GIPS recommendation: The calculation method used by thefirm.)
4.B.3 When gross-of-fee performance is presented, the firm’s fee schedule(s)appropriate to the presentation.
4.B.4 When only net-of-fee performance is presented, the average weightedmanagement and other applicable fees.
4.B.5 Any significant events within the firm (such as ownership or personnel changes)that would help a prospective client interpret the performance record.
4.B.6 AIPS recommends that a disclosure should be made when a change in a pricingformula or valuation model has a material impact on the performance or leverageof a portfolio.
5. Presentation and Reporting
5.A Requirements
5.A.1 The following items must be reported:
(a) At least five years of performance (or a record for the period since firminception, if inception is less than five years) that is GIPS compliant. Afterpresenting five years of performance, firms must present additional annualperformance up to 10 years. (For example, after a firm presents five yearsof compliant history, the firm must add an additional year of performanceeach year so that after five years of claiming compliance, the firm presentsa 10-year performance record).
(b) Annual returns for all years.
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(c) The number of portfolios and amount of assets in the composite and thepercentage of the firm's total assets represented by the composite at theend of each period.
(d) A measure of the dispersion of individual component portfolio returnsaround the aggregate composite return.
(e) AIPS requires firms to use the approved AIPS Compliance Statementprovided in the AIPS Introduction, Section I.B AIPS Claim of Compliance,indicating firmwide compliance with AIPS. (GIPS requirement: Thestandard Compliance Statement indicating firmwide compliance with GIPS.)
(f) The composite creation date.
5.A.2 The effective dates for compliance with AIPS are provided in the AIPSIntroduction, Section I.B AIPS Compliance Dates. (GIPS requirement: Firmsmay link non-GIPS compliant performance to their compliant history, so long asfirms meet the disclosure requirements of Section 4 and no non-compliantperformance is presented for periods after January 1, 2000. (For example, a firmthat has been in existence since 1990 that wants to present its entireperformance history and claim compliance as of January 1, 2000, must presentperformance history that meets the requirements of GIPS at least from January1, 1995, and must meet the disclosure requirements of Section 4 for any non-compliant history prior to January 1, 1995.))
5.A.3 Performance for periods of less than one year must not be annualized.
5.A.4 Performance results of a past firm or affiliation can only be linked to or used torepresent the historical record of a new firm or new affiliation if:
(a) a change only in firm ownership or name occurs, or
(b) the firm has all of the supporting performance records to calculate theperformance, substantially all the assets included in the composites transferto the new firm, and the investment decision-making process remainssubstantially unchanged.
5.A.5 If a compliant firm acquires or is acquired by a non-compliant firm, the firms haveone year to bring the non-compliant firm’s acquired assets into compliance.
5.A.6 If a composite is formed using single asset carve-outs from multiple asset classcomposites, the presentation must include the following:
(a) a list of the underlying composites from which the carve-out was drawn,and
(b) the percentage of each composite the carve-out represents.
5.A.7 The total return for the benchmark (or benchmarks) that reflects the investmentstrategy or mandate represented by the composite must be presented for thesame periods for which the composite return is presented. If no benchmark ispresented, the presentation must explain why no benchmark is disclosed. If thefirm changes the benchmark that is used for a given composite in the
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performance presentation, the firm must disclose both the date and the reasonsfor the change. If a custom benchmark or combination of multiple benchmarks isused, the firm must describe the benchmark creation and re-balancing process.
5.B Recommendations
5.B.1 The following items should be included in the composite presentation ordisclosed as supplemental information:
(a) composite performance gross of investment management fees and custodyfees and before taxes (except for non-reclaimable withholding taxes),
(b) cumulative returns for composite and benchmarks for all periods,
(c) equal-weighted means and median returns for each composite,
(d) volatility over time of the aggregate composite return, and
(e) inconsistencies among portfolios within a composite in the use of exchangerates.
5.B.2 Relevant risk measures-such as volatility, tracking error, beta, modified duration,etc.-should be presented along with total return for both benchmarks andcomposites.
6. Real Estate
6.A Requirements
6.A.1 Real estate must be valued through an independent appraisal at least once everythree years unless client agreements state otherwise.
6.A.2 The following items must be disclosed:
(a) The absence of independent appraisals.
(b) The source of the valuation and the valuation policy.
(c) Total fee structure and its relationship to asset valuation.
(d) The return formula and accounting policies for such items as capitalexpenditures, tenant improvements, and leasing commissions.
(e) The cash distribution and retention policy.
(f) Whether the returns:
(i) are based on audited operating results,
(ii) exclude any investment expense that may be paid by the investors, or
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(iii) include interest income from short-term cash investments or otherrelated investments, and
(iv) the cash distribution and retention policies with regard to income earnedat the investment level.
6.B Recommendations
6.B.1 Real estate should be valued through an independent appraisal at least onceevery twelve months or when a material change in the market has occurred,unless client agreements state otherwise.
6.B.2 Valuations should be adjusted for any capital expenditure.
6.B.3 Real estate valuations should be reviewed at least quarterly.
6.B.4 Income earned at the investment level should be included in the computation ofincome return regardless of the investor’s accounting policies for recognisingincome from real estate investments.
6.B.5 Returns from income and capital appreciation should be presented in addition tototal return.
6.B.6 Equity ownership investment strategies should be presented separately.
6.B.7 When presenting the components of total return, recognition of income at theinvestment level, rather than at the operating level, is preferred.
7. Development Capital (Venture and Private Placements)
7.A Requirements
7.A.1 The following items must be reported for General Partners:
(a) Cumulative internal rate of return (IRR) must be presented since inception ofthe fund and be net of fees, expenses, and carry to the limited partner.
(b) IRR must be calculated based on cash-on-cash returns plus residual value.
(c) Presentation of return information must be in a vintage-year format.
7.A.2 The following items must be disclosed for General Partners:
(a) Changes in the general partner since inception of fund.
(b) Type of investment.
(c) Investment strategy.
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7.A.3 The following items must be reported for Intermediaries and Investment Advisors:
(a) For separately managed accounts and commingled fund-of-funds structures,cumulative IRR must be presented since inception of the fund and be net offees, expenses, and carry to the limited partners but gross of investmentadvisory fees unless net of fees is required to meet applicable regulatoryrequirements.
(b) Calculation of IRR must be based on an aggregation of all the appropriatepartnership cash flows into one IRR calculation - as if from one investment.
(c) The inclusion of all discretionary pooled fund-of-funds and separatelymanaged portfolios in composites must be defined by vintage year.
7.A.4 The following items must be disclosed for Intermediaries and InvestmentAdvisors:
(a) The number of portfolios and funds included in the vintage-year composite.
(b) Composite assets.
(c) Composite assets in each vintage year as a percentage of total firm assets(discretionary and non-discretionary committed capital).
(d) Composite assets in each vintage year as a percentage of total private equityassets.
7.B Recommendations
7.B.1 For General Partners:
(a) Australian Development Capital Industry Association valuation guidelinesshould be used for valuation of development capital investments.
(b) Valuation should be either cost or discount to comparables in the publicmarket for buyout, mezzanine, distressed, or special situation investments.
(c) IRR should be calculated net of fees, expenses, and carry without publicstocks discounted and assuming stock distributions were held.
7.B.2 Net cumulative IRR (after deduction of advisory fees and any other administrativeexpenses or carried interest) should be calculated for separately managedaccounts, managed accounts, and commingled fund-of-funds structures.
7.B.3 The following should be disclosed for General Partners:
(a) gross IRR (before fees, expenses, and carry), which should be used at thefund and the portfolio level, as supplemental information,
(b) the multiple on committed capital net of fees and carry to the limited partners,
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(c) the multiple on invested capital gross of fees and carry,
(d) the distribution multiple on paid-in capital net of fees to the limited partners,and
(e) the residual multiple on paid-in capital net of fees and carry to the limitedpartners.
7.B.4 The following should be disclosed for Intermediaries and Investment Advisors:
(a) The number and size should be expressed in terms of committed capital ofdiscretionary and non-discretionary consulting clients.
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III. VERIFICATION
All references made to GIPS below are applicable to AIPS.
The primary purpose of verification is to establish that a firm claiming compliance with GIPS hasadhered to the standards. Verification will also increase the understanding and professionalismof performance-measurement teams and the consistency of presentation of performanceresults.
The verification procedures attempt to strike a balance between ensuring the quality, accuracyand relevance of performance presentations and minimizing the cost to investment firms ofindependent review of performance results. Investment firms should assess the benefits ofimproved internal process and procedures, which are as significant as the marketingadvantages of verification.
The goal of GIPS committee in drafting the verification procedures is to encourage broadacceptance of verification.
A. Scope and Purpose of Verification
1. Verification is the review of an investment management firm’s performance measurementprocesses and procedures by an independent third-party “verifier.” Verification tests:
A. Whether the investment firm has complied with all the composite constructionrequirements of GIPS on a firmwide basis, and
B. Whether the firm’s processes and procedures are designed to calculate and presentperformance results in compliance with the GIPS standards.
A single verification report is issued in respect of the whole firm; GIPS verification cannot becarried out for a single composite.
2. Third-party verification brings credibility to the claim of compliance and supports the overallguiding principles of full disclosure and fair representation of investment performance.Verification is strongly encouraged and is expected to become mandatory (but no earlierthan 2005). Countries may require verification sooner through the establishment of localstandards.
3. The initial minimum period for which verification can be performed is one year of a firm’s
presented performance. The recommended period over which verification is performed willbe that part of the firm’s track record for which GIPS compliance is claimed.
4. A verification report must confirm that:
A. the investment firm has complied with all the composite construction requirements ofGIPS on a firmwide basis, and
B. the firm’s processes and procedures are designed to calculate and present performanceresults in compliance with the GIPS standards.
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Without such a report from the verifier, the firm cannot claim that its claim of compliance withGIPS has been verified.
5. After performing the verification, the verifier may conclude that the firm is not in compliancewith GIPS, or that the records of the firm cannot support a complete verification. In suchsituations, the verifier must issue a statement to the firm clarifying why a verification reportwas not possible.
6. A principal verifier may accept the work of a local or previous verifier as part of the basis forthe principal verifier’s opinion.
7. The minimum GIPS verification procedures are described in Section III(B), Required
Verification Procedures.
B. Required Verification Procedures
The following are the minimum procedures that verifiers must follow when verifying aninvestment firm’s compliance with GIPS. Verifiers must follow these procedures prior to issuinga verification report to the firm:
1. Pre-verification Procedures
A. Knowledge of the Firm. Verifiers must obtain selected samples of the firm’s investmentperformance reports, and other available information regarding the firm, to ensureappropriate knowledge of the firm.
B. Knowledge of GIPS. Verifiers must understand the requirements and recommendations of
GIPS, including any updates, reports, or clarifications of GIPS published by the InvestmentPerformance Council, the AIMR sponsored body responsible for oversight of the GlobalInvestment Performance Standards.
C. Knowledge of the Performance Standards. Verifiers must be knowledgeable of country-
specific performance standards, laws, and regulations applicable to the firm and mustdetermine any differences between GIPS and the country-specific standards, laws, andregulations.
D. Knowledge of Firm Policies. Verifiers must determine the firm's assumptions and policies
for establishing and maintaining compliance with all applicable requirements of GIPS. At aminimum, verifiers must determine the following policies and procedures of the firm:
i. Policy with regard to investment discretion. The verifier must receive from the firm, inwriting, the firm’s definition of investment discretion and the firm’s guidelines fordetermining whether accounts are fully discretionary.
ii. Policy with regard to the definition of composites according to investment strategy.The verifier must obtain the firm’s list of composite definitions with written criteria forincluding accounts in each composite.
iii. Policy with regard to the timing of inclusion of new accounts in the composites.
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iv. Policy with regard to timing of exclusion of closed accounts in the composites.
v. Policy with regard to the accrual of interest and dividend income.
vi. Policy with regard to the market valuation of investment securities.
vii. Method for computing time-weighted portfolio returns.
viii. Assumptions on the timing of capital inflows/outflows.
ix. Method for computing composite returns.
x. Policy with regard to the presentation of composite returns.
xi. Policies regarding timing of implied taxes due on income and realized capital gains forreporting performance on an after-tax basis.
xii. Policies regarding use of securities/countries not included in a composite’s benchmark.
xiii. Use of leverage and other derivatives.
xiv. Any other policies and procedures relevant to performance presentation.
E. Knowledge of Valuation Basis for Performance Calculations. Verifiers must ensure thatthey understand the methods and policies used to record valuation information forperformance calculation purposes. In particular, verifiers must determine that:
i. the firm's policy on classifying fund flows (e.g., injections, disbursements, dividends,interest, fees, taxes, etc.) is consistent with the desired results and will give rise toaccurate returns;
ii. the firm's accounting treatment of income, interest and dividend receipts is consistentwith cash account and cash accruals definitions;
iii. the firm's treatment of taxes, tax reclaims and tax accruals is correct and the mannerused is consistent with the desired method (i.e., gross- or net-of-tax return);
iv. the firm's policies on recognizing purchases, sales and the opening and closing ofother positions are internally consistent and will produce accurate results; and
v. the firm's accounting for investments and derivatives is consistent with GIPS.
2. Verification Procedures
A. Definition of the Firm. Verifiers must determine that the firm is, and has been,appropriately defined.
B. Composite Construction. Verifiers must be satisfied that:
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i. the firm has defined and maintained composites according to reasonable guidelines incompliance with GIPS;
ii. all of the firm’s actual discretionary fee-paying portfolios are included in a composite;
iii. the manager’s definition of discretion has been consistently applied over time; iv. at all times, all accounts are included in their respective composites and no accounts
that belong in a particular composite have been excluded;
v. composite benchmarks are consistent with composite definitions and have beenconsistently applied over time;
vi. the firm’s guidelines for creating and maintaining composites have been consistently
applied; and vii. the firm’s list of composites is complete.
C. Non-Discretionary Accounts. Verifiers must obtain a listing of all firm portfolios anddetermine on a sampling basis whether the manager’s classification of the account asdiscretionary or non-discretionary is appropriate by referring to the account agreement andthe manager’s written guidelines for determining investment discretion.
D. Sample Account Selection. Verifiers must obtain a listing of open and closed accounts forall composites for the years under examination. Verifiers may check compliance with GIPSusing a selected sample of a firm’s accounts. Verifiers should consider the following criteriawhen selecting the sample accounts for examination:
i. number of composites at the firm; ii. number of portfolios in each composite; iii. nature of the composite; iv. total assets under management;
v. internal control structure at the firm (system of checks and balances in place);
vi. number of years under examination; and
vii. computer applications, software used in the construction and maintenance ofcomposites, the use of external performance measurers and the calculation ofperformance results.
This list is not all-inclusive and contains only the minimum criteria that should be used inthe selection and evaluation of a sample for testing. For example, one potentially usefulapproach would be to choose a portfolio for the study sample that has the largest impact oncomposite performance because of its size or because of extremely good or badperformance. The lack of explicit record keeping or the presence of errors may warrantselecting a larger sample or applying additional verification procedures.
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E. Account Review. For selected accounts, verifiers must determine:
i. whether the timing of the initial inclusion in the composite is in accordance with policiesof the firm;
ii. whether the timing of exclusion from the composite is in accordance with policies ofthe firm for closed accounts;
iii. whether the objectives set forth in the account agreement are consistent with the
manager’s composite definition as indicated by the account agreement, portfoliosummary and composite definition;
iv. the existence of the accounts by tracing selected accounts from account agreements
to the composites; v. that all portfolios sharing the same guidelines are included in the same composite; and vi. that shifts from one composite to another are consistent with the guidelines set forth by
the specific account agreement or with documented guidelines of the firm’s clients.
F. Performance Measurement Calculation. Verifiers must determine whether the firm hascomputed performance in accordance with the policies and assumptions adopted by the firmand disclosed in its presentations. In doing so, verifiers should:
i. recalculate rates of return for a sample of accounts in the firm using an acceptablereturn formula as prescribed by GIPS (i.e., time-weighted rate of return); and
ii. take a reasonable sample of composite calculations to assure themselves of theaccuracy of the asset weighting of returns, the geometric linking of returns to produceannual rates of returns and the calculation of the dispersion of individual returns aroundthe aggregate composite return.
G. Disclosures. Verifiers must review a sample of composite presentations to ensure that thepresentations include the information and disclosures required by GIPS.
H. Maintenance of Records. The verifier must maintain sufficient information to support theverification report. The verifier must obtain a representation letter from the client firmconfirming major policies and any other specific representations made to the verifier duringthe examination.
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C. Detailed Examinations of Investment Performance Presentations
Separate from a GIPS verification, an investment management firm may choose to have afurther, more extensive, specifically focused examination (or performance audit) of a specificcomposite presentation.
Firms cannot make any claim that a particular composite has been independently examinedwith respect to GIPS unless the verifier has also followed the GIPS verification procedures setforth in Section B. Firms cannot state that a particular composite presentation has been “GIPSverified” or make any claim to that effect. GIPS verification relates only to firmwide verification.Firms can make a claim of verification only after a verifier has issued a GIPS verification report.To claim verification of a claim of compliance with the Standards, a detailed examination of aspecific composite presentation is not required. Examinations of this type are unlikely tobecome a requirement of GIPS or become mandatory.
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Appendix A.
GIPS SAMPLE PRESENTATION
XYZ Investment Firm Performance Results: Balanced Composite,January 1, 1995, through December 31, 1999
YearTotal
Return(percent)
BenchmarkReturn
(percent)
Number ofPortfolios
CompositeDispersion(percent)
Total Assets atEnd of Period(DM millions)
Percentageof FirmAssets
TotalFirm
Assets
1995 16.0 14.1 26 4.5 165 70 236
1996 2.2 1.8 32 2.0 235 68 346
1997 22.4 24.1 38 5.7 344 65 529
1998 7.1 6.0 45 2.8 445 64 695
1999 8.5 8.0 48 3.1 520 62 839
XYZ Investment Firm has prepared and presented this report in compliance with theGlobal Investment Performance Standards (GIPS).
Notes:
1. XYZ Investment Firm is a balanced portfolio investment manager that invests solely in Germansecurities. XYZ Investment Firm is defined as an independent investment management firm thatis not affiliated with any parent organization.
2. The benchmark: 30 percent DAX 100; 70 percent EFFAS Bund Index rebalanced monthly.Annualized compound composite return = 11.9 percent; annualized compound benchmark return= 11.4 percent.
3. Valuations are computed in German marks and from Reuters.
4. The dispersion of annual returns is measured by the standard deviation across asset-weightedportfolio returns represented within the composite for the full year.
5. Performance results are presented before management and custodial fees but after all tradingcommissions. The management fee schedule is attached.
6. This composite was created in February, 1995. No alteration of composites as presented herehas occurred because of changes in personnel or other reasons at any time. A complete list offirm composites and performance results is available upon request.
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Appendix B.
AIPS SAMPLE PRESENTATION
PGEC Investment Firm Performance Results: Balanced Composite,July 1, 1995, through June 30, 2002
YearTotal
Return(percent)
BenchmarkReturn
(percent)
Number ofPortfolios
CompositeDispersion(percent)
Total Assets atEnd of Period(AUD millions)
Percentageof FirmAssets
TotalFirm
Assets
1996 24.2 22.4 10 3.5 4,750 52 9,200
1997 13.9 19.5 12 2.1 5,350 53 10,130
1998 13.6 16.3 15 1.9 7,135 51 13,890
1999 12.0 10.1 18 1.4 8,150 55 14,690
2000 6.1 7.0 19 3.3 8,080 54 14,870
2001 5.8 4.9 19 2.9 8,660 51 16,980
2002 2.1 2.2 21 1.5 9,950 54 18,370
PGEC Investment Firm has prepared and presented this report in compliance with theAustralian Investment Performance Standards (AIPS), the Australian Version of the GlobalInvestment Performance Standards (GIPSTM).
Notes:
1. PGEC Investment Firm is defined as an independent investment management firm that is notaffiliated with any parent organisation.
2. The benchmark is constructed on the following basis: 38 % S&P/ASX 300 Accumulation Index;5% S&P/ASX 300 Property Trusts Accumulation Index; 25% MSCI World Accumulation Index (exAustralia) with net dividends reinvested; 20% UBS Warburg Australian Composite Bond Index (AllMaturities); 7% Salomon Brothers World Government Bond Index (ex Australia) Hedged AUDand 5% UBS Warburg Australian Bank Bill Index and is rebalanced monthly.
3. Valuations are computed in Australian Dollars and from Reuters.
4. The dispersion of annual returns is measured by the standard deviation across asset-weightedportfolio returns represented within the composite for the full year.
5. Performance results are presented before management and custodian fees but after all tradingcommissions. The management fee schedule is attached.
6. This composite was created in May 1997. No alteration of composites as presented here hasoccurred because of changes in personnel or other reasons at any time. A complete list of firmcomposites and performance results is available upon request.
35
Notes
36
Notes