Uunder the GIPS, firms may present performance net or gross of fees, but gross-of-fees performane is recommended.
According to Standard 2A4, all return calculations must be gross of fees. Instead of gross of fee returns, firms may report net of fee returns.
Do these two statements conflict with each other?
Return on investments X
Less Trading expenses (X)
= Gross-of-fees return = X
Less Management fees (X)
= Net-of-fees return = X
Therefore, as per Statement 2, all return calculations MUST deduct Trading expenses. In addition, return calculations MAY also deduct Management fees.
Therefore, as per Statement 1, GIPS allows either Gross-of-fees or Net-of-fees - but does not allow “unadjusted return on investments”
There may be also custody fees at point 2 close to management fees.
“Custody fees should not be considered direct trading expenses” (Pg 232 of fine print, Section 3.5)
Therefore custody fees should be ignored (i.e. not deducted) in the above calculations
I said same above.
This is not stated on Pg 232. I wouldn’t agree it should be ignored. Actually it must not be included in Gross of fee return.
All that’s saying is if you are calculating “performance” return you need to deduct fees directly related to the investment process to get a net. Gross is great because I can compare apples to apples how managers attribution hold up against each other pure stock picking. If I look at Net of Fees it’s skewed a little because 1 manager could have super low fees and end up beating the other 1 but the other 1 has more skill. But in the real world… Clients don’t give a F*** as long as you are making money net of fees or beating the bench.
Some cases custody fees are bundled together because you have commingled funds and mutual funds so it’s hard to break out exactly what you are paying for. But overall they all provide some type of estimate in their prospectus.
Great to know! Thanks all for the answers!