Guidance Saemen on Calculaion Mehodology Adopion Dae: 28 Sepember 200 Effecive Dae: January 20 Reroacive Applicaion: No Required www.gipssandards.org 200 CFA Insiue
Guidance Saemen on Calculaion Mehodology GIPS Guidance Saemen on Calculaion Mehodology (Revised) Inroducion Achieving comparabiliy among invesmen managemen firms performancecomplian presenaions requires as much uniformiy as possible in he mehodology used o calculae porfolio and composie reurns. The uniformiy of he reurn calculaion mehodology is dependen on accurae and consisen inpu daa, a criical componen o effecive compliance wih he GIPS sandards. Alhough he GIPS sandards allow flexibiliy in reurn calculaion, he reurn mus be calculaed using a mehodology ha incorporaes he ime-weighed rae of reurn concep for all asses (porfolios excep for privae equiy asses). For informaion on calculaing performance for hese assesprivae equiy, see he separae privae equiy provisions and guidance. The GIPS Ssandards require a ime-weighed rae of reurn because i removes he effecs of exernal cash flows, which are generally clien-driven. Therefore, a imeweighed rae of reurn bes reflecs he firm s abiliy o manage he assesporfolios according o a specified mandae, objecive, or sraegy or objecive, and is he basis for he comparabiliy of composie reurns among firms on a global basis. In his Guidance Saemen, he erm reurn is used, raher han he more common erm performance, o emphasize he disincion beween reurn and risk and o encourage he view of performance as a combinaion of risk and reurn. Risk measures are valuable ools for assessing he abiliies of asse managers; however, his Guidance Saemen focuses only on he reurn calculaion. Money- or dollar-weighed reurns may add furher value in undersanding he impac o he clien of he iming of exernal cash flows, bu are less useful for reurn comparisons and are herefore no covered by his Guidance Saemen. Guiding Principles aluaion Principles The following are guiding principles ha firms mus use when deermining porfolio values as he basis for he reurn calculaions: For periods beginning on or afer January 20, Pporfolios mus be valued in accordance wih he definiion of fair value and he GIPS aluaion Principles in Chaper II of he GIPS sandards. For periods prior o January 20, porfolio valuaions mus be based on marke values (no cos basis or book values). Firms mus value porfolios in accordance wih he composie-specific valuaion policy. o For periods prior o January 200, porfolios mus be valued a leas quarerly. o For periods beweenbeginning on or afer January 200 and, porfolios mus be valued a leas monhly. 200 CFA Insiue
Guidance Saemen on Calculaion Mehodology o January 200, porfolios mus be valued a leas monhly. For periods beginning on or afer January 200, firms mus value porfolios on he dae of all large exernal cash flows. Firms mus define large cash flow for each composie o deermine when porfolios in ha composie mus be valued. o Porfolios mus no be valued more frequenly han required by he composie-specific valuaion policy. For periods beginning on or afer January 200, firms mus value porfolios as of he calendar monh end or he las business day of he monh. Firms mus use rade dae accouning for periods beginning on or afer January 2005. ([Noe: for purposes of he GIPS Ssandards, rade dae accouning recognizes he ransacion asse or liabiliy on he dae of he purchase or sale, no on he selemen dae. Recognizing he asse or liabiliy wihin a leas 3hree days of he dae he ransacion is enered ino (rade dae, T +, T + 2, or T + 3) saisfies his he rade dae accouning requiremen.) for purposes of he GIPS sandards.] Accrual accouning mus be used for fixed-income securiies and all oher assesinvesmens ha accrueearn ineres income. Marke The values of fixedincome securiies mus include accrued income. Accrual accouning should be used for dividends (as of he ex-dividend dae). Calculaion Principles for Porfolios The following are guiding principles ha firms mus use when calculaing porfolio reurns: All reurns mus be calculaed afer he deducion of he acual rading expenses incurred during he period. Firms mus calculae all reurns afer he deducion of he acual rading expenses incurred during he period. no use Eesimaed rading expenses are no permied. Firms mus calculae ime-weighed Toal reurns, including income mus be used. Toal reurn is defined as well ashe rae of he reurn ha includes he realized and unrealized gains and losses plus income for he measuremen period. The calculaion mehod chosen mus represen reurns fairly, mus no be misleading, and mus be applied consisenly. Firms mus use calculae ime-weighed raes of reurn ha adjus for exernal cash flows. Exernal cash flows are is defined as capial (cash or invesmens), securiies, or asses ha eners or exis a porfolio (capial addiions or wihdrawals) and are is generally clien driven. Income earned on a porfolio s assesinvesmens is no considered an exernal cash flow unless i is paid ou of he porfolio. The chosen calculaion mehodology mus For periods beginning on or afer January 2005, firms mus calculae porfolio reurns ha adjus for daily-weighed exernal cash flows for periods beginning January 2005, a he laes. An example of his mehodology is he mmodified Diez mehod. For periods beginning on or afer January 200, a he laes, firms mus calculae performance for inerim sub-periods beween all large exernal cash flows and geomerically link performance o calculae periodic reurns. (Noe: as such, a For periods beginning on or afer January 200, or before if appropriae, 200 CFA Insiue 2
Guidance Saemen on Calculaion Mehodology each firms mus define, prospecively, on a composie-specific basis, wha consiues a large exernal cash flow.) For informaion on calculaing a rue ime-weighed reurn (, see he Time-Weighed Rae of Reurn secion below). Exernal cash flows mus be reaed in a manner consisen manner wih he firm s documened, composie-specific policy. For periods beginning on or afer January 200, Ffirms mus calculae porfolio reurns a leas on a monhly basis. For periods prior o 200, firms may calculae porfolio reurns on amus be calculaed a leas quarerly basis. Periodic and sub-period reurns mus be geomerically linked. Calculaion Principles for Composies The following are guiding principles ha firms mus use when calculaing composie reurns: Composie reurns mus be calculaed by asse-weighing he individual porfolio reurns using beginning-of-period values or a mehod ha reflecs boh beginningof-period values and exernal cash flows. The aggregae reurn mehod, which combines all he composie asses and cash flows o calculae composie performance as if he composie were one porfolio, is accepable as an asse-weighed approach. For periods beginning on or afer January 2006 and prior o January 200, firms mus calculae composie reurns by asse-weighing he individual porfolio reurns a leas quarerly. For periods beginning on or afer January 200, composie reurns mus be calculaed by asse-weighing he individual porfolio reurns a leas monhly. Periodic and sub-period reurns mus be geomerically linked. Cash Flow Principles The following are guiding principles ha firms mus consider when defining heir composie-specific cash flow policies: An exernal cash flow is a flow of capial (cash, securiies, or assesinvesmens) ha eners or exis a porfolio, which are is generally clien driven. When calculaing approximaed raes of reurn, where he calculaion mehodology requires an adjusmen for he daily-weighing of cash flows, he formula reflecs a weigh for each exernal cash flow. The cash flow weigh is deermined by he amoun of ime he cash flow is held in he porfolio. When calculaing a more accurae ime-weighed reurn, a large exernal cash flow mus be defined by each firm for each composie o deermine when he porfolios in ha composie are o be revalued for performance calculaions. I is he level a which a clien-iniiaedhe firm deermines ha an exernal cash flow of cash and or securiies ino or ou of a porfolio may disor performance if he porfolio is no revalued. Firms mus define he amoun in erms of he value of he cash/asse flow, or in erms of a percenage of he porfolio asses or he composie asses. The large cash flow deermines when a porfolio is o be valued for performance calculaions. 200 CFA Insiue 3
Guidance Saemen on Calculaion Mehodology A large cash flowthis is differeniaed from a significan cash flow, which occurs in siuaions where cash flows disrup he implemenaion ofhe firm deermines ha a clien-direced exernal cash flow may emporarily preven he invesmenfirm from implemening he composie sraegy. and he porfolio is emporarily removed from he composie or he exernal cash flow is placed in a emporary new accoun. Please see he Guidance Saemen on he Treamen of Significan Cash Flows, which deails he procedures and crieria ha firms mus adhere o and offers addiional opions for dealing wih he impac of significan cash flows on porfolios. Time-Weighed Rae of Reurn aluing he porfolio and calculaing inerim reurns each ime here is an exernal cash flow ough o resuls in he mos accurae mehod o calculae he ime-weighed raes of reurn, referred o as he rue ime-weighed rae of reurn mehod. TheA formula for calculaing ahe rue ime-weighed porfolio reurn whenever here are no exernal cash flows occur is: where R i ( EM M ) i i i i, ri, M i i E r i he reurn for period i in which here are no exernal cash flows he ending value of he porfolio for period i E i i he beginning value of he porfolio for period i where EM i is he marke value of he porfolio a he end of sub-period i, excluding any cash flows in he period, bu including accrued income for he period. M i is he marke value a he end of he previous sub-period (i.e., he beginning of he curren sub-period), plus any cash flows a he end of he previous sub-period, where an inflow is posiive and an ouflow is negaive, and including accrued income up o he end of he previous period. The cash inflow is included in he M (previous period EM + posiive cash inflow) of he sub-period when he cash inflow is available for invesmen a he sar of he sub-period; a cash ouflow is refleced in he M (previous period EM + negaive cash ouflow) of he sub-period when he cash ouflow is no longer available for invesmen a he sar of he sub-period. When a porfolio experiences exernal cash flows during a period, he mos accurae reurn is calculaed by valuing he porfolio a he ime of he exernal cash flow, calculaing he ime-weighed reurn for each sub-period (defined as he period beween exernal cash flows), and hen geomerically linking he sub-period reurns using he following formula:the sub-period reurns are hen geomerically linked o calculae he period s reurn according o he following formula: 200 CFA Insiue 4
Guidance Saemen on Calculaion Mehodology TWR R [( + r ) ( + r ) ( + r )], (( + R ) ( + R )...( + R )) r 2 TR n 2 I where R TR is he period s oal reurn and R, R 2 R n are he sub-period reurns for subperiod hrough n respecively.where r is he ime-weighed reurn for period and TWR period consiss of I sub-periods. Approximaion of Time-Weighed Rae of Reurn As menioned in he Iinroducion, he GIPS sandards require firms o calculae reurns using a mehodology ha incorporaes he a ime-weighed rae of reurn, concep (excep for privae equiy asses). The GIPS Ssandards allow flexibiliy in choosing he calculaion mehodology, which means ha firms may use alernaive formulas, provided he calculaion mehod chosen represens reurns fairly, is no misleading, and is applied consisenly. Calculaing a rue ime-weighed rae of reurn is no an easy ask and may be cos inensive. For hese reasons, firms may use an approximaion mehod o calculae he oal reurn of he individual porfolios for he periods and sub-periods. The mos common approximaion mehods combine specific rae of reurn mehodologies (such as he original Diez mehod, he mmodified Diez mehod, he original IRR (inernal rae of reurnirr) mehod, and he Modified IRR Modified AI (ank Adminisraion Insiue) mehod) for sub-periods, and incorporae he ime-weighed rae of reurn concep byhen geomerically linksing he sub-period reurns. Jus as he GIPS sandards ransiion o more frequen valuaions, he GIPS Ssandards also ransiion o more precise calculaion mehodologies. Therefore, he GIPS sandards require firms o calculae approximaed ime-weighed raes of reurn ha adjus for daily-weighed exernal cash flows (e.g., mmodified Diez mehod) byfor periods beginning on or afer January 2005. For periods beginning on or afer January 200, firms are and will required heo calculaeion of a more accurae ime-weighed rae of reurn and are required wih o valueaions porfolios occurring a he ime of each large exernal cash flow, as well as a calendar monh-end or on he las business day of he monh for periods beginning January 200. According o he Modified Diez mehod he porfolio reurn can be calculaed using he formula: where r ModDiez 0 CF n + ( CF w ) 0 I E CFi, MD i r ( ), I + i i CFi, wi, i i MD r he Modified Diez reurn for he porfolio for period 200 CFA Insiue 5
Guidance Saemen on Calculaion Mehodology E he ending value of he porfolio for period he beginning value of he porfolio for period i he number of exernal cash flows (, 2, 3 I) in period CF i, he value of cash flow i in period w i, he weigh of cash flow i in period (assuming he cash flow occurred a he end of he day), as calculaed according o he following formula: where w i, D D D i,, w i, he weigh of cash flow i in period, assuming he cash flow occurred a he end of he day D he oal number of calendar days in period D i, he number of calendar days from he beginning of period o cash flow i While This Guidance Saemen does no only conains deails onabou he differen Modified Diez mehod, oher formulas for calculaing approximae ime-weighed raes of reurn are also permied. Composie Reurn Calculaion Provision 2.A.3 The GIPS sandards requires ha composie reurns mus be calculaed by asse weighing he individual porfolio reurns using beginning-of-period values or a mehod ha reflecs boh beginning-of-period values and exernal cash flows. The inenion is o show a composie reurn ha reflecs he overall reurn of he se of he porfolios included in he composie. To calculae composie reurns, firms may use alernaive formulas so long as he calculaion mehod chosen represens reurns fairly, is no misleading, and is applied consisenly. According o he eginning Marke alue-asses Weigheding mehod he composie reurn, R M, can be calculaed using he formula: ( M Ri ) R n i i R M MTOTAL K ( k, rk, ) k K where R he beginning asses weighed reurn for he composie for period k number of porfolios (, 2, 3,, K) in he composie a he beginning of period 200 CFA Insiue 6 k k,,
Guidance Saemen on Calculaion Mehodology, he beginning value of porfolio k for period k r k, he reurn of porfolio k for period where M i is he beginning marke value (a he sar of he period) for a porfolio, R i is he rae of reurn for porfolio i, and M TOTAL is he oal marke value a he beginning of he period for all he porfolios in he composie. The eginning Asses Weighing mehod can also be expressed as: R r w r K K k, k, K k, k, k k k, k where wk, is he weigh of he value of porfolio k as a fracion of oal composie asse value based on beginning asse values for period, and can be calculaed according o he following formula: w k, K k k, k, The eginning Marke alueasses Plus Weighed Cash Flow-Weighed mehod represens a refinemen o he asse-weighed approachbeginning asses weighing mehod. Consider he case in which one of wo porfolios in a composie doubles in marke value as he resul of a conribuion on he hird day of a performance period. Under he asse-weighed approachbeginning asses weighing mehod, his porfolio will be weighed in he composie based solely on is beginning marke value (i.e., no including he conribuion). The beginning marke value and asses plus weighed cash flow-weighed mehod resolves his problem by including he effec of exernal cash flows in he weighing calculaion as well as in he marke values. Assuming ha exernal cash flows occur a he end of he day, he weighing facor for each cash flow is calculaed as: W i, j D D CD D i, k, i, j, wi, k,, CD D 200 CFA Insiue 7
Guidance Saemen on Calculaion Mehodology where CD is he oal number of calendar days in he period and D i,j is he number of calendar days since he beginning of he period in which cash flow j occurred in porfolio i. w i,k, he weigh of cash flow i in porfolio k in period, assuming he cash flow occurred a he end of he day D he oal number of calendar days in period D i,k, he number of calendar days from he beginning of period o cash flow i in porfolio k The beginning marke valueasses pplus Weighed ccash fflow-weighed composie reurn, R M+CF, can be calculaed as follows: R R M + CF n i K k, + k i m {( Mi + ( CF ) } j i, j Wi j Ri m ( Mi + ( CFi, j Wi j ), n K k, + k i i j, Ik ( CFi, k, wi, k, ) r Ik ( CFi, k, wi, k, ) k, where CF i,j is he cash flow j wihin he period for porfolio i (conribuions o he porfolio are posiive flows, and wihdrawals or disribuions are negaive flows) and R i is he reurn for porfolio i. R he beginning asses plus weighed cash flow composie reurn for period k,, he beginning value of porfolio k for period I k he number of cash flows (i, 2, 3,, I k ) in porfolio k CF i,k, he i h cash flow in porfolio k for period w i,k, he weigh of cash flow i in porfolio k for period r k, he reurn for porfolio k for period The eginning Asses Plus Weighed Cash Flow composie reurn mehod can also be expressed by he following formula: where R K, k K k k, k r k,, R he beginning asse plus weighed cash flow composie reurn for period r k, he reurn for porfolio k for period 200 CFA Insiue 8
Guidance Saemen on Calculaion Mehodology k, he beginning value plus weighed cash flows of porfolio k for period as calculaed according o he following formula: I k k, k, + i ( CF w ), i, k, i, k, where k, he value of porfolio k s beginning asses plus weighed cash flows for period, he beginning value of porfolio k for period k I k he number of cash flows (i, 2, 3,, I k ) in porfolio k CF i,k, he i h cash flow in porfolio k for period w i,k, he weigh of cash flow i in porfolio k for period The Aggregae Reurn mehod combines all he composie asses and exernal cash flows before any calculaions occur o calculae reurns as if he composie were one porfolio. The mehod is also accepable as an asse-weighed approach. Geomeric Linking of he Periodic Composie Reurns To calculae he composie reurn over more han one (period or sub-)period, he composie reurn over he oal period is calculaed by geomerically linking he individual composie sub-periodperiodic reurns using he following formula: R CT (( + RC ) ( + RC 2 )... ( + R )) TWR R + r + r + r Cn [( ) ( ) ( )], 2 I TWR where R is he ime weighed composie reurn for period and period consiss of I sub-periods. where R CT is he composie reurn over he oal period and R C, R C2, and R Cn are he individual composie reurns for he sub-periods, 2, and n, respecively. Addiional Consideraions Changes o he Mehodology Where appropriae, in he ineres of fair represenaion and full disclosure, firms should disclose when a change in amaerial changes o heir calculaion mehodology or and valuaion source resuls in a maerial impac on he composie reurn policies and/or mehodologies. Third-Pary Performance Measuremen Firms may use porfolio reurns calculaed by a hird-pary performance measurer as long as he mehodology adheres o he requiremens of he GIPS sandards. Differen aluaion and/or Calculaion Mehod 200 CFA Insiue 9
Guidance Saemen on Calculaion Mehodology Firms are permied o include porfolios wih differen valuaion and/or calculaion mehodologies wihin he same composie (as long as he mehodologies adhere o he requiremens of he GIPS sandards). Firms mus be consisen in he mehodology used for a porfolio (e.g., firms canno change he mehodology for a porfolio from monh o monh). Monh End aluaions Firms mus be consisen in defining he (monhly) valuaion period. The valuaion period mus end on he same day as he reporing period. In oher words, firms mus value he porfolio/composie on he las day of he reporing period (or he neares business day). AggregaingIncluding porfolios wih differen ending valuaion daes in he same composie is no permied for periods beginning on or afer January 2006. For periods beginning on or afer January 200, firms mus value porfolios as of he calendar monh end or he las business day of he monh. Trading Expenses Reurns mus be calculaed afer he deducion of allhe acual rading expenses. Trading expenses are he acual coss of buying or selling a securiy, and include invesmens. These coss ypically ake he form of brokerage commissions, exchange fees, axes, bidoffer spreads from eiher inernal or exernal brokers, and any oher regulaory fee, duy, ec. associaed wih an individual ransacion. Cusodial fees charged per ransacion should be considered cusody fees and no rading expenses. Trade Dae Accouning Firms mus use rade dae accouning for periods beginning on or afer January 2005. Trade-dae accouning recognizes an asse or liabiliy on he dae he ransacion is enered inoof he purchase or sale, no on he selemen dae. Recognizing he asse or liabiliy wihin a leas 3hree days of he dae he ransacion is enered ino saisfies he rade-dae accouning requiremen. As a resul, he accoun will recognize any change beween he price of he ransacion and he curren marke value. Taxes Firms mus disclose relevan deails of he reamen of wihholding axes on dividends, ineres income, and capial gains., if maerial. Reurns should be calculaed ne of nonreclaimable wihholding axes on dividends, ineres, and capial gains. Reclaimable wihholding axes should be accrued. Grossing Up or Neing Down of Invesmen Managemen Fees Firms are allowed o include porfolios wih differen grossing-up mehodologies wihin he same composie. Firms mus be consisen in he mehodology used for a porfolio (e.g., firms canno change he mehodology for a porfolio from monh o monh). Please see he gguidance Saemen on Fees for he GIPS sandards. Large Cash Flows The firm mus have an esablished composie-specific policy on defining and adjusingvaluing for large cash flows and apply his policy consisenly. Acual valuaion a he ime of any large exernal cash flow is required for periods beginning on or afer January 200. 200 CFA Insiue 0
Guidance Saemen on Calculaion Mehodology Disclosures Firms mus disclose ha addiional informaion regarding policies for valuing porfolios, calculaing performance, and reporing reurns ispreparing complian presenaions are available upon reques. Generally, he firm s policies and procedures on calculaing and reporing reurns could serve as he basis for his informaion. Effecive Dae The effecive dae for his Guidance Saemen is January 20. When bringing pas performance ino compliance, firms may comply wih his version of he Guidance Saemen or wih prior versions in effec a he ime. Prior versions of his Guidance Saemen are available on he GIPS sandards websie (www.gipssandards.org). This Guidance Saemen was originally effecive June 2004 and was revised o reflec he changes o he GIPS sandards effecive as of January 2006. Firms are encouraged, bu no required, o apply his guidance prior o he original Effecive Dae of June 2004; however, he original guidance mus be applied o all presenaions ha include performance for periods on and afer ha dae. The revisions made o his guidance (effecive January 2006) mus be applied o all presenaions ha include performance for periods afer 3 December 2005. Key GIPS Provisions Specifically Applicable o Calculaion Mehodology.A.2 Porfolio valuaions mus be based on marke values (no cos basis or book values)..a.3 For periods prior o January 200, porfolios mus be valued a leas quarerly. For periods beween January 200 and January 200, porfolios mus be valued a leas monhly. For periods beginning January 200, firms mus value porfolios on he dae of all large exernal cash flows..a.4 For periods beginning January 200, firms mus value porfolios as of he calendar monh-end or he las business day of he monh..a.5 For periods beginning January 2005, firms mus use rade dae accouning..a.6 Accrual accouning mus be used for fixed-income securiies and all oher asses ha accrue ineres income. Marke values of fixed-income securiies mus include accrued income..a.7 For periods beginning January 2006, composies mus have consisen beginning and ending annual valuaion daes. Unless he composie is repored on a noncalendar fiscal year, he beginning and ending valuaion daes mus be a calendar year-end (or on he las business day of he year). 2.A Calculaion Mehodology Requiremens 200 CFA Insiue
Guidance Saemen on Calculaion Mehodology 2.A. Toal reurn, including realized and unrealized gains and losses plus income, mus be used. 2.A.2 Time-weighed raes of reurn ha adjus for exernal cash flows mus be used. Periodic reurns mus be geomerically linked. Exernal cash flows mus be reaed in a consisen manner wih he firm s documened, composie-specific policy. A a minimum: a. For periods beginning January 2005, firms mus use approximaed raes of reurn ha adjus for daily-weighed exernal cash flows. b. For periods beginning January 200, firms mus value porfolios on he dae of all large exernal cash flows. 2.A.3 Composie reurns mus be calculaed by asse weighing he individual porfolio reurns using beginning-of-period values or a mehod ha reflecs boh beginning-ofperiod values and exernal cash flows. 2.A.4 Reurns from cash and cash equivalens held in porfolios mus be included in oal reurn calculaions. 2.A.5 All reurns mus be calculaed afer he deducion of he acual rading expenses incurred during he period. Esimaed rading expenses are no permied. 2.A.6 For periods beginning January 2006, firms mus calculae composie reurns by asse weighing he individual porfolio reurns a leas quarerly. For periods beginning January 200, composie reurns mus be calculaed by asse weighing he individual porfolio reurns a leas monhly. 2.A.7 If he acual direc rading expenses canno be idenified and segregaed from a bundled fee: a. when calculaing gross-of-fees reurns, reurns mus be reduced by he enire bundled fee or he porion of he bundled fee ha includes he direc rading expenses. The use of esimaed rading expenses is no permied. b. when calculaing ne-of-fees reurns, reurns mus be reduced by he enire bundled fee or he porion of he bundled fee ha includes he direc rading expenses and he invesmen managemen fee. The use of esimaed rading expenses is no permied. 2. Calculaion Mehodology Recommendaions 2.. Reurns should be calculaed ne of nonreclaimable wihholding axes on dividends, ineres, and capial gains. Reclaimable wihholding axes should be accrued. 2..2 Firms should calculae composie reurns by asse weighing he member porfolios a leas monhly. 2..3 Firms should value porfolios on he dae of all large exernal cash flows. Applicaions: 200 CFA Insiue 2
Guidance Saemen on Calculaion Mehodology. Does he firm violae he GIPS sandards by reporing money-weighed raes of reurn o an exising clien for heir porfolio (which conains no privae equiy asses)? No, he Sandards would no be violaed if he firm repored money-weighed raes of reurn o an exising clien for heir porfolio. The Sandards are primarily based on he concep of presening he firm's composie performance o a prospecive clien raher han presening individual porfolio reurns o an exising clien. The IRR (or money-weighed reurn) represens he performance of he specific clien's fund holdings (i.e., influenced by he clien's iming and amoun of cash flows) and measures he performance of he fund raher han he performance of he fund manager. Money-weighed reurns may add furher value in undersanding he impac o he clien of he iming of exernal cash flows, bu are less useful for comparison purposes. IRRs are only required in he GIPS sandards when calculaing performance for privae equiy asses where he invesmen firm conrols he cash flows. 2. The GIPS sandards currenly sae ha firms are required o use rade-dae accouning as of January 2005. How should rade dae be defined? For he purposes of he GIPS sandards, rade-dae accouning is defined as recognizing he asse or liabiliy wihin a leas 3 days of he dae he ransacion is enered ino. Selemen-dae accouning is defined as recognizing he asse or liabiliy on he dae in which he exchange of cash, securiies, and paperwork involved in a ransacion is compleed. When using selemen-dae accouning, any movemen in value beween he rade dae or booking dae and he selemen dae will no have an impac on performance reurn unil selemen dae; whereas for rade-dae accouning, he change in marke value will be refleced for each valuaion beween rade dae and selemen dae. If he rade and selemen daes sraddle a performance measuremen period-end dae, hen performance reurn comparisons beween porfolios ha use selemen-dae accouning and hose ha use rade-dae accouning may no be valid. The same problem occurs when comparing selemen-dae porfolios and benchmarks. The principle behind requiring rade-dae accouning is o ensure here is no a significan lag beween rade execuion and reflecing he rade in he performance of a porfolio. For he purposes of compliance wih he GIPS sandards, porfolios are considered o saisfy he rade-dae accouning requiremen provided ha ransacions are recorded and recognized consisenly and wihin normal marke pracice--ypically, a period beween rade dae and up o hree days afer rade dae (T+3). Afer January 2005, all firms mus recognize ransacions on rade dae as defined herein. 3. Given he following informaion, calculae he rae of reurn for his porfolio for January, February, March, and he firs quarer of 2000, using a rue imeweighed rae of reurn: 200 CFA Insiue 3
Guidance Saemen on Calculaion Mehodology Dae Marke alue ( ) Cash Flow ( ) Marke alue Pos Cash Flow ( ) 2/3/99 500,000 /3/00 509,000 2/9/00 53,000 +50,000 563,000 2/28/00 575,000 3/2/00 585,000 20,000 565,000 3/3/00 570,000 200 CFA Insiue 4