The Input Data and Calculation Methodology section for Firms is the second section of the GIPS 2020 with the following key features:

  • Unlike the old of the GIPS, that is the 2010 edition that had Input Data provisions separate from Calculation Methodology provisions, under the proposed new structure, these two have been combined into one set of Standards both for Firms and for Asset Owners.
  • What it seeks to do is to outline the data needed by compliant and prospective compliant Firms and the methodologies to be used in calculating performance parameters such as returns and risk.
  • As previously noted under the Firm Fundamentals of Compliance post, these principles apply to all asset classes managed by Firms using Composite or pooled fund structures for presentation of performance. Here again, Asset Owners have their self-contained section related to input data and calculation methodology, separate from this section for Firms.
  • The combined number of Standards under this section are now 50 requirements and 8 recommendations.
  • Here again, not all Standards will apply based on the nature of operations and asset classes and strategies used by the particular Firm, so applicability rules still apply.

Guidance Statements Consolidated

This section has converted certain best practices contained in Guidance Statements into specific provisions. The areas drawn from are:

1. Alternative Investment

2. Overlay

3. Calculation Methodology

4. Wrap Fee

5. Risk

It also has relevant portions from the Valuation Principles, Fundamentals of Compliance, Composite Construction, Private Equity and Real Estate sections of the 2010 edition all consolidated here for easy reference and application based on asset class and strategy of the Firm.

New Standards and Other Changes

Apart from the consolidations, the key new Standards that have been added here include:

1. The requirement not to include Advisory-Only Assets (2.A.1b) and uncalled Committed Capital in Total Firm Assets (2.A.1C).

2. An explicit requirement to include the impact of leverage on Total Firm Assets instead of grossing it up (2.A.2b).

3. The requirement that discretionary portfolios managed by Sub-Advisors must be subject to the same policies and procedures as other portfolios (2.A.4).

4. New section on Overlay exposure (2.A.6 to 2.A.9) specifying what Total Firm Overlay Exposure must include and the calculation methods and input data for Overlay Exposure and Overlay Strategy returns determination.

5. The requirement to deduct Transaction Costs, including estimated Transaction Costs when calculating returns, instead of the use of actual Trading Expenses and Transaction Expenses (2.A.15).

6. Specification of how Additional Risk Measures must be calculated when a Firm chooses to present them (2.A.20).

7. Requirement specifying when and how Time-Weighted Returns must be calculated for Pooled Funds that are not included in a Composite (2.A.28).

8. Addition of ‘Valuation Review’ or “Financial Statement Audits” as ways in which Private Market Investments can meet the requirement of an independent party confirmation of the value of such investments at least every 12 months (2.A.44). The Financial Statement Audit must be by an independent public accounting Firm (2.A.46).

9. New section for ‘Side Pockets’ and ‘Subscription Line of Credit’ mostly drawn from the Guidance Statement on Alternative Investment Strategies and Structures (2.A.50 to 2.A.51).

10. Direct incorporation of the Valuation Principles in the recommendations section (2.B.6).

11. Specification of return basis (Gross-of-Fees) to be used when calculating risk measures (2.A.7).

Comments Requiring Feedback by GIPS Organization

The GIPS Organization requires your feedback on the following specific areas:

1. Whether Firms should be allowed to include or not include Advisory-Only Assets and Committed Capital respectively in Total Firm Assets (Comment #7).

2. Whether Firms (Comment #8):

a. should be allowed to use estimated Transaction Costs.

b. Firms will have the ability to determine if estimated Transaction Costs are conservative.

c. and how Firms should treat Research Costs when determining Transaction costs.

3. How Firms should use preliminary, estimated values (Comment #9).

4. Whether Firms should use daily external cash flows when calculating Money-Weighted Returns (Comment #10).

5. Whether the requirement of external valuation, valuation review or financial statement audit for Private Market Investments is appropriate and whether doing this once every 12-month period is adequate and the other forms of valuation that should be allowed (Comment #11).

6. Whether the new requirement for Firms to present returns that include Side Pockets is appropriate (Comment #12).

7. Whether Firms should be recommended to use net-of-fees returns instead of gross when calculating risk measures; and whether your response will be different if performance-based fees or carried interest are involved (Comment #13).

How to Send in Your Comments

We have made it easy for you to go through the comments in bite-sizes and to submit your responses quickly by completing comment survey forms covering the feedback areas requested and more. At the end of the commenting period (December 31, 2018), we will compile all the comments received and forward to the GIPS Organization for review.

Sign-up for free on our Composite Insider platform here to do so.

Alternatively, you can send your written responses to the GIPS Organization.

In the next post, we review the changes to Composite & Pooled Fund Maintenance for Firms.