Performance Presentation, Including the GIPS Standards
Performance presentation tests whether you can put a track record in front of a prospective client without misleading them. The GIPS standards are the core of this domain: they are a voluntary, firm-wide ethical framework for presenting investment results - not a law, not a guarantee of future performance, and not a certification of any individual.
Firm-level requirements
- Compliance is claimed firm-wide, never for a single portfolio or composite. A firm defines itself in a way that reflects the total assets it manages.
- All actual, fee-paying, discretionary portfolios must be included in at least one composite. Composites are defined by investment mandate, objective or strategy - never retroactively constructed after the fact.
- Composite returns are asset-weighted using beginning values plus weighted external cash flows, not equal-weighted averages of portfolio returns.
- Portfolios must be valued at least monthly and on the date of all large cash flows; trade-date and accrual accounting are required.
- Firms show at least five years of compliant performance, building to ten, and may not link simulated or backtested results with actual results.
- Gross-of-fees and net-of-fees returns must be presented; net returns reflect actual fees, or a model fee disclosed as such.
Disclosures and verification
Required disclosures include the benchmark and its total return, the composite description, the fee schedule, dispersion (internal or external) for composites with six or more portfolios for full years, and the composite's assets. Verification is a third-party, firm-wide test of whether a firm's policies and procedures have been implemented - it is not a check that the returns are correct, and a firm can be GIPS compliant without ever being verified.
Worked example
Two portfolios in a composite: A, beginning value 100m, return 8%; B, beginning value 300m, return 4%. Asset-weighted composite return = (100 × 8% + 300 × 4%) ÷ (100 + 300) = (8 + 12) ÷ 400 = 5.0%. The equal-weighted average, 6.0%, would overstate the composite because the larger portfolio performed worse. Note the weights use beginning value plus weighted cash flows, so a mid-month inflow into B would change both numerator and denominator.
Traps that cost marks
- Presenting an equal-weighted composite return, or weighting by ending values.
- Claiming GIPS compliance at portfolio or composite level rather than firm-wide.
- Treating verification as a requirement, or as evidence that returns are accurate.
- Creating a composite in hindsight from the best-performing accounts.
- Showing only gross returns, or omitting dispersion and composite assets from the presentation.