Charlottesville, Va. (Jan. 9, 2003) -- The Association for Investment Management and Research has added new provisions related to fee disclosure and private equity valuation to its Global Investment Performance Standards.
In a move aimed at making it easier for investors to compare fees and investment returns, the new GIPS fee provisions, effective Jan. 1, 2005, provide a standardized approach, based on the principles of fair representation and full disclosure, for firms to calculate and report their investment returns. The fee provisions use the gross-of-fees return less the investment management fee that the prospective client expects to pay as the basis for comparison. The provisions recommend that firms show gross-of-fees performance results, but require them to disclose in each presentation the appropriate fee schedule for both the product being sold and the type of prospective client being shown the results. All returns (gross and net) must be calculated after the deduction of the actual trading expenses incurred during the period.
Under the provisions, firms that include a bundled fee portfolio in a composite must disclose that fact and must state the types of fees that are included in the bundled fee. In situations where firms invest a portion of a larger portfolio in a pooled fund, utilize a sub-advisor or create a fund-of-funds structure where additional fees are charged by the underlying fund or paid to the sub-advisor, firms should present the return net of all fees, since all investors pay those fees. If a composite includes non-fee-paying portfolios, the firm must disclose that fact as well as the percentage of the composite assets represented by the non-fee-paying portfolios. The fee provisions are available online at www.aimr.org/standards/pps/gips.html .
The private equity valuation principles recommend the use of fair value basis and outline requirements for the calculation of Since Inception-Internal Rate of Return (SI-IRR), net-of-fee rates and various multiples. The equity valuation principles, which target fund-raising activities, outline requirements in five areas: input data, calculation methodology, composite construction, disclosure, and presentation and reporting. Under the provisions, firms must calculate the annualized SI-IRR, using either daily or monthly cash flows and the period-end valuation of unliquidated remaining holdings. Firms must also calculate net-of-fees returns based on defined criteria, and present both the net-of-fees and gross-of-fees annualized SI-IRR of the fund for each year since inception. Other reporting requirements include total value to paid-in capital, cumulative distributions to paid-in capital, paid-in capital to committed capital, and residual value to paid-in capital multiples.
The provisions require that firms document their valuation procedures and disclose that the procedures are available upon request. Procedures should be reviewed by a qualified person or entity that is independent from the valuer.
The provisions were developed by the Investment Performance Council, the oversight body for GIPS coordinated by AIMR that is comprised of investment-measurement experts from around the world. AIMR is encouraging firms to adopt the new standards before next year. The GIPS standards, which are voluntary, are followed by firms in more than 30 countries, according to the group.
-- WebCPA staff
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