An investment firm, 'Dynamic Returns Inc.,' recently became GIPS compliant. The firm manages several composites, including a 'Small-Cap Growth' composite. For this composite, Dynamic Returns uses a time-weighted rate of return calculation, net of all fees. The firm's marketing materials include the composite's returns for the past seven years. However, in the GIPS-compliant presentation, the firm only includes the last five years of performance data, stating that its GIPS compliance date was established five years ago. Is Dynamic Returns Inc. compliant with GIPS regarding its performance presentation for the 'Small-Cap Growth' composite?
- ANo, because it must present at least 10 years of performance data.
- BNo, because all available performance data, regardless of GIPS compliance, must be presented.
- CYes, provided the firm has a GIPS-compliant calculation methodology for all seven years.
- DYes, because it is presenting the minimum required five years of GIPS-compliant data.
Show answer & explanationAnswer & explanation
Correct answer: D. Yes, because it is presenting the minimum required five years of GIPS-compliant data.
GIPS requires firms to present a minimum of five years of GIPS-compliant performance. If a firm has been GIPS compliant for less than 10 years, it must present performance since its GIPS compliance inception date, up to the minimum of five years. Dynamic Returns Inc. has presented five years of GIPS-compliant data, which meets the minimum initial requirement. The firm will then add one additional year of performance each year, up to a minimum of 10 years.
Why the other options are wrong
- A. 10 years is the eventual goal, but 5 years is the initial minimum.
- B. GIPS only requires the presentation of GIPS-compliant data. Non-compliant data should not be presented as GIPS-compliant.
- C. While the calculation methodology for all seven years might be compliant, the GIPS standard explicitly states the minimum years to be presented, starting with five, then building to ten.
GIPS Initial Compliance History
When a firm first becomes GIPS compliant, it must present a minimum of five years of GIPS-compliant performance. If the firm or composite has been in existence for less than five years, it must present performance since the composite's or firm's inception.
- Minimum initial presentation: 5 years of GIPS-compliant data.
- If less than 5 years old, present since inception.
- Add 1 year annually until 10 years are presented.
Memory trick: GIPS History: Start with Five, Grow to Ten.