The 2020 edition of the Global Investment Performance Standards (GIPS®) was released by CFA Institute on June 30, 2019. One of the key changes to the GIPS standards is the expanded ability to use money-weighted returns versus time-weighted returns.
In the 2010 edition of the GIPS standards, time-weighted returns were required for all composites, except for private equity. Private equity composites were required to present since-inception internal rates of return (SI-IRR). Real estate closed-end fund composites were required to present both time-weighted returns and an SI-IRRs.
In response to industry demand and assertions that SI-IRRs are more appropriate than time-weighted returns for many strategies beyond private equity and real estate, the use of SI-IRRs was expanded within the 2020 edition of the GIPS Standards. With this expansion, the hope is that more firms, including alternatives managers, will be encouraged to claim compliance.
The new provisions replace the term SI-IRR with money-weighted returns and do not specify a specific method for calculating money-weighted returns. Both modified Dietz or SI-IRR are acceptable methods for calculating money-weighted returns.
A significant item to note is that the 2010 edition of the GIPS standards required SI-IRRs to be presented for each annual period end. With the 2020 edition, the requirement is to only show one money-weighted return, the annualized composite since-inception money-weighted return through the most recent annual period end.
Within the 2020 edition of the GIPS Standards, a money-weighted return is defined as a return for a period that reflects the change in value and the timing and size of external cash flows. The following conditions must be met for firms to be able to present money-weighted returns instead of time-weighted returns:
- The firm has control over the external cash flows and
- Portfolios in the composite have, or the pooled fund has, at least one of the following characteristics:
- The portfolios are, or the pooled fund is, closed-end
- The portfolios have, or the pooled fund has, a fixed life
- The portfolios have, or the pooled fund has, a fixed commitment
- A significant part of the investment strategy are illiquid investments
Once the firm chooses if it will present time-weighted returns, money-weighted returns, or both for each composite or pooled fund, it must consistently present the selected returns for each composite or pooled fund. Firms may choose to still present time-weighted returns if they are determined to be more appropriate. However, firms can now consider the option of presenting only money-weighted returns if they meet the criteria for doing so.
There are several requirements for calculating the money-weighted returns. Firms must:
- Value portfolios at least annually and as of the period end for any period for which performance is calculated;
- Calculate annualized since-inception money-weighted returns;
- Calculate money-weighted returns using daily external cash flows, as of January 1, 2020;
- Include stock distributions as external cash flows and value stock distributions at the time of distribution;
- When calculating pooled fund net returns, calculate pooled fund net returns that are net of total pooled fund fees; and
- When calculating composite money-weighted returns, calculate composite returns by aggregating the portfolio-level information for those portfolios included in the composite.
It is important to note that while the 2010 edition of the GIPS standards included a provision for firms to calculate money-weighted returns with daily cash flows as of January 1, 2011, firms that newly come into compliance will be required to use daily cash flows in money-weighted return calculations as of January 1, 2020 and are not required to use daily cash flows prior to that date. However, firms should use daily cash flows if they are available for periods prior to January 1, 2020.
Presentation and Reporting
Firms must present in each GIPS report:
- The annualized composite since-inception money-weighted return through the most recent annual period end;
- When the composite has a track record that is less than a full year, the non-annualized composite since-inception money-weighted return through the initial annual period end;
- When the composite terminates, the annualized composite since-inception money-weighted return through the composite termination date; and
- The since-inception money-weighted return for the benchmark for the same periods as presented for the composite, unless the firm determines there is no appropriate benchmark.
It is recommended, but not required, for firms to present:
- Annualized since-inception money-weighted return as of each annual period end; and
- Both annualized gross-of-fees and net-of-fees composite since-inception money-weighted return.
There are two required disclosures specific to money-weighted returns. First, firms must disclose the frequency of external cash flows used in the money-weighted return calculation if daily frequency was not used. Second, if the firm changes from one type of return to another (e.g. from time-weighted returns to money-weighted returns), the firm must disclose the change and the date of the change. This disclosure must be included for a minimum of one year and for as long as it is relevant to interpreting the track record.
Subscription Lines of Credit
If subscription lines of credit are used, firms must present the since-inception money-weighted return both with and without the subscription line of credit through the most recent annual period end. However, a firm is not required to present returns without the subscription line of credit when the subscription line of credit had the principal repaid within 120 days using committed capital drawn down through a capital call and no principal was used to fund distributions. When calculating money-weighted returns for composites and pooled funds without the subscription lines of credit, the firm must reflect cash flows to and from the line of credit as external cash flows.
The 2020 edition of the GIPS standards has an effective date of January 1, 2020. GIPS Reports that include performance for periods ending on or after December 31, 2020 must be prepared in accordance with the 2020 edition of the GIPS standards. Firms may choose to early adopt the 2020 GIPS standards. If firms choose to early adopt, they must comply with all requirements of the 2020 edition of the GIPS standards.