The Firm Composite Money-Weighted Return Report is the fifth section of the Global Investment Performance Standards (GIPS) 2020 Exposure Draft. Its focus is on Firms that use the Money-Weighted Return methodology to prepare compliant presentations for Composites.
This section, like the Composite Time-Weighted Return Report, combines the Disclosure, Presentation and Reporting sections for both traditional asset class and Private Market Investments managers that use Segregated Account vehicles in executing their investment mandates. The Wrap Fee/Separately Managed Account and Carve-Out provision sections of the 2010 edition of the Standards have also been consolidated under this section.
Most of the Standards in this section are the same or similar to that contained in the Composite Time-Weighted Return Report except in certain key areas outlined below and contains 54 Requirements and 15 Recommendations categorized under Presentation & Reporting and Disclosure sub-sections.
As always, the applicability principle still holds here.
Key Differences Between Time-Weighted Standards & Money-Weighted Standards
The Time-Weighted Standards and Money-Weighted Standards differ in the following key areas:
1. Return Methodology Used – Time-Weighted methods that eliminate the impact of external cash flows and Money-Weighted methods that don’t
2. Frequency of Return Presented – Whereas the Time-Weighted Reports require annual returns for each annual period (4.A.1 & 6.A.1), the Money-Weighted Reports require Since-Inception returns through the most recent annual period (5.A.1 & 7.A.1).
3. Committed Capital & Distributions – Whereas Money-Weighted reports specify certain additional presentations and disclosures related to Committed Capital (5.A.4 & 7.A.4), Time-Weighted reports specify no such presentations and disclosures because there is no Committed Capital in this case.
4. Risk Presentations & Disclosures – Whereas the Time-Weighted reports related to Composites and Pooled Funds specify a risk measure that must be presented (4.A.1j-l & 6.A.1h-j), the Money-Weighted Composite and Pooled Fund reports do not specify a specific measure (5.A.5 & 7.A.5).
Who Qualifies to Present Money-Weighted Returns
It is important to note that not all Firms qualify to present Money-Weighted Return Reports. Only Firms that meet the conditions specified under Standard Provision 1.A.31, qualify to present this and it is in addition to the Time-Weighted Returns Report. The conditions are:
1. Firm Must control external cash flows
2. Composite/Portfolio Must be Closed-Ended
3. Composite/Portfolio Must be a Fixed Commitment Vehicle
4. Composite/Portfolio Must have a Fixed Life
5. Illiquid Investments Must be a significant part of the investment strategy
Guidance Statements Consolidated
Here too, specific Standards have been drawn from best practice guidance areas like the Guidance Statements, Q&As and discussions. The Guidance Statements areas include:
1. Draft Guidance Statement on Benchmarks
2. Draft Guidance Statement on Use of Supplemental Information
3. Guidance Statement on Alternative Investment Strategies and Structures
4. Draft Guidance Statement on Risk
5. Guidance Statement on Real Estate
6. Guidance Statement on Private Equity
7. Guidance Statement on Carve-Outs
8. Guidance Statement on Error Correction
The notable new Standards in this section are:
1. The requirement to present Composite Since-Inception Money-Weighted Returns both with and without Subscription Line of Credit (5.A2).
2. The requirement to present appropriate Ex Post risk measure for Composite and Benchmark or a qualitative narrative of risk description (5.A.5).
3. The requirement to present total uncalled Committed Capital separately from Total Firm Assets if they choose to present (5.A.11).
Other Notable Changes
1. The Sunset Provision option for Disclosures mentioned in the Composite Time-Weighted Return Report post can also be found here in the the same or similar wording that Firms must disclose:
1A. All significant events for a minimum of one year and as long as relevant (5.C.15).
1B. Changes to the name of Composite for at least one year and as long as relevant (5.C.19).
1C. Prospective and Retroactive Benchmark changes for as long as returns for prior Benchmark are included in GIPS Composite Reports for Prospective changes and for a minimum of one year for retroactive changes (5.C.28).
1D. Changes to GIPS Composite Reports due to Material Error for a minimum of one year and as long as relevant (5.C.34).
1E. Changes to the type of returns presented for a minimum of one year and as long as relevant (5.C.37).
2. Another change is the introduction of a key new term, Subscription Line of Credit, to represent a ‘loan facility put in place to facilitate administration when Firms are calling for funds from investors’.
Comments Requiring Feedback by GIPS Organization
The GIPS Organization requires your feedback on the following specific areas:
1. Whether Firms should only be required to present returns for only one period, that is, since inception through to the most recent annual period end for Money-Weighted Return Reports (Comment #19).
2. Whether Firms must present returns with and without Subscription Line of Credit, whether returns with such descriptions should be described differently, whether Firms should distinguish between short term and long term Subscription Line of Credit and whether returns with and without Subscription Line of Credit should only be required for Money-Weighted Return presentation only (Comment #20).
3. Whether Firms must only present Committed Capital, Distributions and related multiples as of the most recent annual period end only or not (Comment #21).
4. Whether Since-Inception Returns with different start dates provide any meaningful information to require their presentation (Comment #22).
5. Whether the move to allow Firms to retire certain Disclosures after a period should be allowed and whether the identified sunset Disclosures are exhaustive (Comment #23).
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 Firm Pooled-Fund Time-Weighted Return Report.