Question: Bentwood Institutional Asset Management has been managing equity, fixed- income, and balanced accounts since 1986. The firm became GIPS-compliant on 1 January 2001 and prepared composite performance presentations for the 1996-2000 period. Fixed-income performance was poor prior to 2001, when a new team of managers was brought on board. When Christopher Cooper joins Bentwood as marketing director in June 2006, he suggests showing performance starting with calendar 2001, the first year that performance started to improve. He proposes to show composites with returns for the five calendar years 2001 through 2005. Does this course of action comply with the GIPS standards?
Answer: The GIPS standards require that at least five years of GIPS-compliant perfor- mance be reported (or for the period since firm’s inception or the composite inception date if the firm or the composite has been in existence less than five years). After presenting a minimum of five years of GIPS-compliant perfor- mance (or for the period since firm’s inception or the composite inception
date if the firm or composite has been in existence less than five years), the firm must present an additional year of performance each year, building up to a minimum of 10 years of GIPS-compliant performance (I.5.A.1a). Bentwood Institutional Asset Management could not drop the years prior to 2001 at the time Cooper suggests it do so. In addition to violating a specific requirement, Cooper’s suggestion was not in the spirit of fair representation and full disclo- sure of performance. Technically, the firm will be able drop the early years of its composite presentation once it has established a 10-year GIPS-compliant record, as long as it continues to show at least the most recent 10 years. For instance, it will be able to show just the 10 calendar years 2001-2010 after the composite returns for 2010 become available. However, it is recommended that Bentwood show its entire GIPS-compliant performance record (I.5.B.7). (See Sections 3.12 and 3.13 of the reading.)
I think this firm complies with GIPS because it presents at least 5 years. They announced in 2001 with compliance of GIPS, why they need to presents the performance before 2001? Confused
I think the answer explains it quite well. The performance periods exist for more than 10 years, so in order to comply with GIPS, the firm needs to present performance for the last 10 years.
Even the firm announced in 2001 with compliance of GIPS, it still needs to provide 10 years of performance (if any) and state which periods do not comply with GIPS.
Thank you for that. But what is the meaning of " minimum five years performance"?
If a company has existed for 3 years, then it needs to have a 3-year performance. If a company has existed for 7 years, then it needs to have a 7-year performance. If a company has existed for 12 years, then it needs to have a minimum of 10-year performance.
So what is the meaning of stating " minimum five years"?
Here is written in the curriculum, I think it can answer your question:
At least five years of performance (or for the period since the firm’s inception or the composite inception date if the firm or the composite has been in existence less than five years) that meets the requirements of the GIPS standards. After a firm presents a minimum of five years of GIPS-compliant performance (or for the period since the firm’s inception or the composite inception date if the firm or the composite has been in existence less than five years), the firm must present an additional year of performance each year, building up to a minimum of 10 years of GIPS-compliant performance.
thanks for the effort. But it does not clarify what is the meaning of a minimum of five years. The statement only mentions minimum of five years is required.
Initially they have the obbligation to present 5Y of performance (1996-2000), that is the minimum required.
Then they have the obbligation have to add 1y up to reach 10Y of performance (1996-2005). At this point they cannot simply drop the 10Y history, but only substituing the a new year with the oldest one
If the company was in place for 7Y they have the obbligation only for 5Y not for 7Y, then start to add 1Y up to 10Y
Year 2000 Step 1: are you a new or old firm
Year 2000 Step 2: if new provide since inception, if old provide minimum 5 years data or more, in year 2000 because they are a old long existing firm they start with 5 years data
After the year 2000
Add 1 extra year so 2001:5 years+1
2005: 5years+5
Minimum 10years
The minimum 5 years is referring ONLY to the first year of compliance back in 2000, thereafter you build up to 10 years performance data over time