GIPS Calculations and Methodology Requirements and Recommendations

1. Total returns include the realized and unrealized gains and incomes
2. Must use Time-Weighted Rate of Return (any methods remove the effects of external cash flow)
3. After 2005, use methods adjust of daily weighted external cash flow
4. After 2010, has to value at every large external cash flow
5. Use GM for linking
6. Composite can use different method for different portfolio but has to be consistent
7. Dietz Method (before 2005)
1. R=(EMV – BMV – CF)/ (BMV+0.5CF)
2. CF is calculated as the daily weighted
8. Modified Dietz Method (after 2005)
1. R=(EMV-BMV-CF)/(BMV+Sum(CFi*Wi)
2. Wi=(CD-Di)/CD)
3. Not accurate when there is large cash flow
4. Not accurate when the market is volatile
9. Modified IRR (After 2005)
1. MIRR
2. EMV = Sum(CFi*(1+MIRR)^Wi)
3. Can have multiple solutions
10. True TWRR (After 2010)
1. Calculate Ri=(EMV-BMV)/BMV whenever there is external cash flow
2. Use GM (aka cumulative return, chain-length return)
3. Include accrual incomes
4. Subperiod ends on the day of new cash flow (assume cannot be invested until the next day)
5. Need accurate daily valuation, otherwise the error may be larger than approximated one

Cash and Cash Equivalent:

Must include all cash income in the portfolio as long as the manager has control over

Has to deduct both the direct and indirect (e.g. bid-ask spread) trading fees

Estimated cost CANNOT be used!

Therefore, either deduct the WHOLE bundle fees or, only it is known, the direct fee related to the transaction!

A composite is a set of individual portfolios representing the similar investment strategies

Beginning Market Value Weighted Composite:

R = Sum(BMVi*Ri)/Sum(BMVi)

Beginning Market Value + CF Weighted Composite (like Modified Dietz method)

R = Sum((BMVi+Sum(CFij*Wj))*Ri)/Sum(BMVi+Sum(CFij*Wj))

Aggregate return method: Just combine everything as one single portfolio

From 2006, need Asset Weighting at least quarterly

After 2010, do this monthly

Recommendations:

Asset Weighting Monthly after 2006

For reclaimable tax, should be treated in accrual way (at the expense and recover later)

Value portfolios on days of any large external cash flow