GUIDANCE STATEMENT ON CALCULATION METHODOLOGY Adopon Dae: 9/28/0 Effecve Dae: //20 Reroacve Applcaon: No Requred www.gpssandards.org 204 CFA Insue
Gudance Saemen on Calculaon Mehodology GIPS GUIDANCE STATEMENT ON CALCULATION METHODOLOGY Inroducon Achevng comparably among frms complan presenaons requres as much unformy as possble n he mehodology used o calculae porfolo and compose reurns. The unformy of he reurn calculaon mehodology s dependen on accurae and conssen npu daa a crcal componen o complance wh he GIPS sandards. Alhough he GIPS sandards allow flexbly n reurn calculaon he reurn mus be calculaed usng a mehodology ha ncorporaes he me-weghed rae of reurn concep for all porfolos excep for prvae equy. For nformaon on calculang performance for prvae equy see he prvae equy provsons and gudance. The GIPS sandards requre a me-weghed rae of reurn because removes he effecs of exernal cash flows whch are generally clen-drven. Therefore a me-weghed rae of reurn bes reflecs he frm s ably o manage he porfolos accordng o a specfed mandae objecve or sraegy and s he bass for he comparably of compose reurns among frms on a global bass. In hs Gudance Saemen he erm reurn s used raher han he more common erm performance o emphasze he dsncon beween reurn and rsk and o encourage he vew of performance as a combnaon of rsk and reurn. Rsk measures are valuable ools for assessng he ables of asse managers; however hs Gudance Saemen focuses only on he reurn calculaon. Money- or dollar-weghed reurns may add furher value n undersandng he mpac o he clen of he mng of exernal cash flows bu are less useful for reurn comparsons and are herefore no covered by hs Gudance Saemen. Gudng Prncples aluaon Prncples The followng are gudng prncples ha frms mus use when deermnng porfolo values as he bass for reurn calculaons: For perods begnnng on or afer January 20 porfolos mus be valued n accordance wh he defnon of far value and he GIPS aluaon Prncples n Chaper II of he GIPS sandards. For perods pror o January 20 porfolo valuaons mus be based on marke values (no cos bass or book values). Frms mus value porfolos n accordance wh he compose-specfc valuaon polcy. o For perods pror o January 200 porfolos mus be valued a leas quarerly. CFA Insue GIPS Gudance Saemen on Calculaon Mehodology
Gudance Saemen on Calculaon Mehodology o For perods begnnng on or afer January 200 porfolos mus be valued a leas monhly. o For perods begnnng on or afer January 200 frms mus value porfolos on he dae of all large cash flows. Frms mus defne large cash flow for each compose o deermne when porfolos n ha compose mus be valued. o Porfolos mus no be valued more frequenly han requred by he compose-specfc valuaon polcy. For perods begnnng on or afer January 200 frms mus value porfolos as of he calendar monh end or he las busness day of he monh. Frms mus use rade dae accounng for perods begnnng on or afer January 2005. [Noe: for purposes of he GIPS sandards rade dae accounng recognzes he asse or lably on he dae of he purchase or sale no on he selemen dae. Recognzng he asse or lably whn hree days of he dae he ransacon s enered no (rade dae T + T + 2 or T + 3) sasfes he rade dae accounng requremen for purposes of he GIPS sandards.] Accrual accounng mus be used for fxed-ncome secures and all oher nvesmens ha earn neres ncome. The value of fxed-ncome secures mus nclude accrued ncome. Accrual accounng should be used for dvdends (as of he ex-dvdend dae). Calculaon Prncples for Porfolos The followng are gudng prncples ha frms mus use when calculang porfolo reurns: All reurns mus be calculaed afer he deducon of he acual radng expenses ncurred durng he perod. Frms mus no use esmaed radng expenses. Toal reurns mus be used. Toal reurn s defned as he rae of he reurn ha ncludes he realzed and unrealzed gans and losses plus ncome for he measuremen perod. The calculaon mehod chosen mus represen reurns farly mus no be msleadng and mus be appled conssenly. Frms mus calculae me-weghed raes of reurn ha adjus for exernal cash flows. Exernal cash flow s defned as capal (cash or nvesmens) ha eners or exs a porfolo and s generally clen drven. Income earned on a porfolo s nvesmens s no consdered an exernal cash flow unless s pad ou of he porfolo. For perods begnnng on or afer January 2005 frms mus calculae porfolo reurns ha adjus for daly-weghed exernal cash flows. An example of hs mehodology s he Modfed Dez mehod. For perods begnnng on or afer January 200 a he laes frms mus calculae performance for nerm sub-perods beween all large cash flows and geomercally lnk performance o calculae perodc reurns. (Noe: For perods begnnng on or afer January 200 frms mus defne prospecvely on a compose-specfc bass wha consues a large cash flow.) For nformaon on calculang a rue me-weghed reurn see he Tme-Weghed Rae of Reurn secon below. CFA Insue GIPS Gudance Saemen on Calculaon Mehodology 2
Gudance Saemen on Calculaon Mehodology Exernal cash flows mus be reaed n a manner conssen wh he frm s documened compose-specfc polcy. For perods begnnng on or afer January 200 frms mus calculae porfolo reurns a leas monhly. For perods pror o 200 porfolo reurns mus be calculaed a leas quarerly. Perodc and sub-perod reurns mus be geomercally lnked. Calculaon Prncples for Composes The followng are gudng prncples ha frms mus use when calculang compose reurns: Compose reurns mus be calculaed by asse-weghng he ndvdual porfolo reurns usng begnnng-of-perod values or a mehod ha reflecs boh begnnngof-perod values and exernal cash flows. The aggregae reurn mehod whch combnes all he compose asses and cash flows o calculae compose performance as f he compose were one porfolo s accepable as an asse-weghed approach. For perods begnnng on or afer January 2006 and pror o January 200 frms mus calculae compose reurns by asse-weghng he ndvdual porfolo reurns a leas quarerly. For perods begnnng on or afer January 200 compose reurns mus be calculaed by asse-weghng he ndvdual porfolo reurns a leas monhly. Perodc and sub-perod reurns mus be geomercally lnked. Cash Flow Prncples The followng are gudng prncples ha frms mus consder when defnng her compose-specfc cash flow polces: An exernal cash flow s a flow of capal (cash or nvesmens) ha eners or exs a porfolo whch s generally clen drven. When calculang approxmaed raes of reurn he calculaon mehodology requres an adjusmen for he dalyweghng of cash flows he formula reflecs a wegh for each exernal cash flow. The cash flow wegh s deermned by he amoun of me he cash flow s held n he porfolo. When calculang a more accurae me-weghed reurn a large cash flow mus be defned by each frm for each compose o deermne when he porfolos n ha compose are o be valued for performance calculaons. I s he level a whch he frm deermnes ha an exernal cash flow may dsor performance f he porfolo s no valued. Frms mus defne he amoun n erms of he value of he cash/asse flow or n erms of a percenage of he porfolo asses or he compose asses. The large cash flow deermnes when a porfolo s o be valued for performance calculaons. A large cash flow s dfferenaed from a sgnfcan cash flow whch occurs n suaons he frm deermnes ha a clen-dreced exernal cash flow may emporarly preven he frm from mplemenng he compose sraegy and he porfolo s emporarly removed from he compose or he exernal cash flow s placed n a emporary new accoun. Please see he Gudance Saemen on he Treamen of Sgnfcan Cash Flows whch deals he procedures and crera CFA Insue GIPS Gudance Saemen on Calculaon Mehodology 3
Gudance Saemen on Calculaon Mehodology ha frms mus adhere o and offers addonal opons for dealng wh he mpac of sgnfcan cash flows on porfolos. Tme-Weghed Rae of Reurn alung he porfolo and calculang nerm reurns each me here s an exernal cash flow resuls n he mos accurae mehod o calculae he me-weghed raes of reurn. The formula for calculang he me-weghed porfolo reurn when here are no exernal cash flows s: r E r he reurn for perod n whch here are no exernal cash flows E he endng value of he porfolo for perod he begnnng value of he porfolo for perod When a porfolo experences exernal cash flows durng a perod he mos accurae reurn s calculaed by valung he porfolo a he me of he exernal cash flow calculang he me-weghed reurn for each sub-perod (defned as he perod beween exernal cash flows) and hen geomercally lnkng he sub-perod reurns usng he followng formula: [( + r ) ( + r ) ( + r )] TWR 2 I r TWR r s he me-weghed reurn for perod and perod consss of I sub-perods. Approxmaon of Tme-Weghed Rae of Reurn As menoned n he nroducon he GIPS sandards requre frms o calculae a meweghed rae of reurn excep for prvae equy. The GIPS sandards allow flexbly n choosng he calculaon mehodology whch means ha frms may use alernave formulas provded he calculaon mehod chosen represens reurns farly s no msleadng and s appled conssenly. Calculang a me-weghed rae of reurn s no an easy ask and may be cos nensve. For hese reasons frms may use an approxmaon mehod o calculae he oal reurn of he ndvdual porfolos for he perods and sub-perods. The mos common approxmaon mehods combne specfc rae of reurn mehodologes (such as he orgnal Dez mehod he Modfed Dez mehod he orgnal IRR (nernal rae of reurn) mehod and he Modfed AI (ank Admnsraon Insue) mehod) for subperods and hen geomercally lnks he sub-perod reurns. CFA Insue GIPS Gudance Saemen on Calculaon Mehodology 4
Gudance Saemen on Calculaon Mehodology Jus as he GIPS sandards ranson o more frequen valuaons he GIPS sandards also ranson o more precse calculaon mehodologes. Therefore he GIPS sandards requre frms o calculae approxmaed me-weghed raes of reurn ha adjus for daly-weghed exernal cash flows (e.g. Modfed Dez mehod) for perods begnnng on or afer January 2005. For perods begnnng on or afer January 200 frms are requred o calculae a more accurae me-weghed rae of reurn and are requred o value porfolos a he me of each large cash flow as well as a calendar monh-end or on he las busness day of he monh. Accordng o he Modfed Dez mehod he porfolo reurn can be calculaed usng he formula: E MD I + r I CF ( ) CF w MD r he Modfed Dez reurn for he porfolo for perod E he endng value of he porfolo for perod he begnnng value of he porfolo for perod he number of exernal cash flows ( 2 3 I) n perod CF he value of cash flow n perod w he wegh of cash flow n perod (assumng he cash flow occurred a he end of he day) as calculaed accordng o he followng formula: w D D D w he wegh of cash flow n perod assumng he cash flow occurred a he end of he day D he oal number of calendar days n perod D he number of calendar days from he begnnng of perod o cash flow Whle hs Gudance Saemen only conans deals abou he Modfed Dez mehod oher formulas for calculang approxmae me-weghed raes of reurn are also permed. Compose Reurn Calculaon The GIPS sandards requre ha compose reurns mus be calculaed by asse weghng he ndvdual porfolo reurns usng begnnng-of-perod values or a mehod ha reflecs boh begnnng-of-perod values and exernal cash flows. CFA Insue GIPS Gudance Saemen on Calculaon Mehodology 5
Gudance Saemen on Calculaon Mehodology The nenon s o show a compose reurn ha reflecs he overall reurn of he se of he porfolos ncluded n he compose. To calculae compose reurns frms may use alernave formulas so long as he calculaon mehod chosen represens reurns farly s no msleadng and s appled conssenly. Accordng o he egnnng Asses Weghng mehod he compose reurn R can be calculaed usng he formula: R ( k rk ) k k k R he begnnng asses weghed reurn for he compose for perod k number of porfolos ( 2 3 ) n he compose a he begnnng of perod k he begnnng value of porfolo k for perod r k he reurn of porfolo k for perod The egnnng Asses Weghng mehod can also be expressed as: R r w r k k k k k k k k wk s he wegh of he value of porfolo k as a fracon of oal compose asse value based on begnnng asse values for perod and can be calculaed accordng o he followng formula: w k k k k The egnnng Asses Plus Weghed Cash Flow mehod represens a refnemen o he begnnng asses weghng mehod. Consder he case n whch one of wo porfolos n a compose doubles n value as he resul of a conrbuon on he hrd day of a performance perod. Under he begnnng asses weghng mehod hs porfolo wll be CFA Insue GIPS Gudance Saemen on Calculaon Mehodology 6
Gudance Saemen on Calculaon Mehodology weghed n he compose based solely on s begnnng value (.e. no ncludng he conrbuon). The begnnng asses plus weghed cash flow mehod resolves hs problem by ncludng he effec of exernal cash flows n he weghng calculaon. Assumng ha exernal cash flows occur a he end of he day he weghng facor for each cash flow s calculaed as: w k D D D k w k he wegh of cash flow n porfolo k n perod assumng he cash flow occurred a he end of he day D he oal number of calendar days n perod D k he number of calendar days from he begnnng of perod o cash flow n porfolo k The egnnng Asses Plus Weghed Cash Flow compose reurn can be calculaed as follows: R k + k k + k Ik ( CF k w k ) r Ik ( CF k w k ) R he begnnng asses plus weghed cash flow compose reurn for perod k he begnnng value of porfolo k for perod I k he number of cash flows ( 2 3 I k ) n porfolo k CF k he h cash flow n porfolo k for perod w k he wegh of cash flow n porfolo k for perod r k he reurn for porfolo k for perod k The egnnng Asses Plus Weghed Cash Flow compose reurn mehod can also be expressed by he followng formula: R k k k k r k R he begnnng asse plus weghed cash flow compose reurn for perod CFA Insue GIPS Gudance Saemen on Calculaon Mehodology 7
Gudance Saemen on Calculaon Mehodology r k he reurn for porfolo k for perod k he begnnng value plus weghed cash flows of porfolo k for perod as calculaed accordng o he followng formula: I k k k + ( CF w ) k k k he value of porfolo k s begnnng asses plus weghed cash flows for perod he begnnng value of porfolo k for perod k I k he number of cash flows ( 2 3 I k ) n porfolo k CF k he h cash flow n porfolo k for perod w k he wegh of cash flow n porfolo k for perod The Aggregae Reurn mehod combnes all he compose asses and exernal cash flows before any calculaons occur o calculae reurns as f he compose were one porfolo. The mehod s also accepable as an asse-weghed approach. Geomerc Lnkng of he Perodc Compose Reurns To calculae he compose reurn over more han one perod or sub-perod he compose reurn over he oal perod s calculaed by geomercally lnk he ndvdual compose perodc reurns usng he followng formula: [( + r ) ( + r ) ( + r )] TWR 2 I R TWR R s he me weghed compose reurn for perod and perod consss of I sub-perods. Addonal Consderaons Changes o he Mehodology Where approprae n he neres of far represenaon and full dsclosure frms should dsclose maeral changes o her calculaon and valuaon polces and/or mehodologes. Thrd-Pary Performance Measuremen Frms may use porfolo reurns calculaed by a hrd-pary performance measurer as long as he mehodology adheres o he requremens of he GIPS sandards. Dfferen aluaon and/or Calculaon Mehod Frms are permed o nclude porfolos wh dfferen valuaon and/or calculaon mehodologes whn he same compose as long as he mehodologes adhere o he requremens of he GIPS sandards. Frms mus be conssen n he mehodology used for a porfolo (e.g. frms canno change he mehodology for a porfolo from monh o CFA Insue GIPS Gudance Saemen on Calculaon Mehodology 8
Gudance Saemen on Calculaon Mehodology monh). Monh End aluaons Frms mus be conssen n defnng he (monhly) valuaon perod. The valuaon perod mus end on he same day as he reporng perod. In oher words frms mus value he porfolo/compose on he las day of he reporng perod or he neares busness day. Includng porfolos wh dfferen endng valuaon daes n he same compose s no permed for perods begnnng on or afer January 2006. For perods begnnng on or afer January 200 frms mus value porfolos as of he calendar monh end or he las busness day of he monh. Tradng Expenses Reurns mus be calculaed afer he deducon of he acual radng expenses. Tradng expenses are he acual coss of buyng or sellng nvesmens. These coss ypcally ake he form of brokerage commssons exchange fees axes bd-offer spreads from eher nernal or exernal brokers and any oher regulaory fee duy ec. assocaed wh an ndvdual ransacon. Cusodal fees charged per ransacon should be consdered cusody fees and no radng expenses. Trade Dae Accounng Frms mus use rade dae accounng for perods begnnng on or afer January 2005. Trade-dae accounng recognzes an asse or lably on he dae of he purchase or sale no on he selemen dae. Recognzng he asse or lably whn hree days of he dae he ransacon s enered no sasfes he rade-dae accounng requremen. Taxes Frms mus dsclose relevan deals of he reamen of whholdng axes on dvdends neres ncome and capal gans f maeral. Reurns should be calculaed ne of nonreclamable whholdng axes on dvdends neres and capal gans. Reclamable whholdng axes should be accrued. Grossng Up or Neng Down of Invesmen Managemen Fees Frms are allowed o nclude porfolos wh dfferen grossng-up mehodologes whn he same compose. Frms mus be conssen n he mehodology used for a porfolo (e.g. frms canno change he mehodology for a porfolo from monh o monh). Please see he Gudance Saemen on Fees. Large Cash Flows The frm mus have an esablshed compose-specfc polcy on defnng and valung for large cash flows and apply hs polcy conssenly. Acual valuaon a he me of any large cash flow s requred for perods begnnng on or afer January 200. Dsclosures Frms mus dsclose ha polces for valung porfolos calculang performance and preparng complan presenaons are avalable upon reques. Effecve Dae CFA Insue GIPS Gudance Saemen on Calculaon Mehodology 9
Gudance Saemen on Calculaon Mehodology The effecve dae for hs Gudance Saemen s January 20. When brngng pas performance no complance frms may comply wh hs verson of he Gudance Saemen or wh pror versons n effec a he me. Pror versons of hs Gudance Saemen are avalable on he GIPS sandards webse (www.gpssandards.org). CFA Insue GIPS Gudance Saemen on Calculaon Mehodology 0