Presenting investment portfolio performance to clients or investors is crucial for investment managers and advisors. Proper presentation builds trust and transparency while allowing for performance comparison. The Global Investment Performance Standards (GIPS) provide an ethical framework for investment firms to calculate and present historical returns. Compliance demonstrates commitment to fair representation and full disclosure. When constructing presentations, investment portfolio returns should be calculated accurately and composite portfolios representing similar mandates should be created. Firms must disclose details on performance, firm policies, and a GIPS compliance claim to provide context. Adhering to GIPS ensures investment managers avoid misrepresenting performance and enable prospective clients to properly evaluate past investment results.
Defining the firm and discretion establishes boundaries for performance data
The GIPS fundamentals require investment firms to appropriately define the firm and discretion. This sets clear boundaries for determining total firm assets and which portfolios must be included in composites. Firm definition and discretion criteria prevent firms from cherry-picking top performers or excluding terminated accounts that would lower overall returns. Defining these principles is the foundation for reliable firm-wide investment performance data and comparisons.
Construction of composites enables comparison based on similar mandates
The GIPS standards require investment firms to construct composites representing similar investment mandates or strategies. Rather than highlighting singular portfolios, composites provide an asset-weighted average return of all portfolios following a mandate. Composite returns allow for comparison between firms based on similar objectives rather than overall company performance. Constructing meaningful composites prevents firms presenting performance of one particularly successful portfolio or during a shorter positive return period.
Disclosures on firm performance policies provide transparency
To comply with GIPS, investment firms must disclose important details regarding performance data methodologies and company policies. This supplementary information enables clients to properly contextualize investment returns and understand firm practices. Key disclosures relate to whether returns are gross or net of fees, use of simulated histories, treatment of terminated accounts, changes in personnel or firm structure, and composite investment objectives. Firms claiming compliance must also include an appropriate GIPS compliance statement. Full disclosure allows prospective clients to make well-informed decisions.
Presentation must follow GIPS formats to show transparent data
After gathering necessary performance inputs, making GIPS-aligned calculations, constructing composites, and determining disclosures, firms must present information following GIPS presentation formats. This structure clearly conveys composite returns over time, benchmark comparisons, and number of portfolios represented alongside the required disclosures. Standardized presentation facilitates easy comparison across investment managers. Firms can supplement presentations with additional data but core elements must adhere to GIPS. Overall, integrated compliance with calculation, construction, disclosure, and presentation guidelines enables transparent evaluation of past investment performance.
Properly defining the firm and portfolios in composites, accurately calculating returns, disclosing policies and fees, and presenting data in line with GIPS establishes trust and facilitates comparative analysis between investment firms. Compliance guards against misrepresentation while providing clients full information to make decisions.