Q & A Database

The GIPS Standards Q&A database contains questions and answers (Q&As) on various searchable topics that provide additional interpretation on an issue. Q&As are considered to be authoritative guidance and must be followed in order to claim compliance with the GIPS standards.

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Archived

Effective: 1 December, 2013 - 31 December, 2019

Categories: Wrap Fee Portfolios

Source: GIPS Executive Committee

I would like to present gross-of-fees returns for a sponsor-specific composite which contains only actual wrap fee/SMA portfolios to an existing wrap fee/SMA sponsor. I know the entire wrap fee (150 basis points) as well as the investment management fee (50 basis points) that is included in the wrap fee. This leaves the “portion of the bundled fee containing trading expenses” equal to 100 basis points. Can I add back the 50 basis points (investment management fee portion of the total wrap fee) to calculate a more accurate gross-of-fees return?

The Wrap Fee/SMA Guidance Statement provides that when calculating gross-of-fees performance for composites that include wrap fee/SMA portfolios to be presented only to existing wrap fee/SMA clients, firms may add back any fees and expenses they can identify within the wrap fee except for the trading expenses. When presenting gross-of-fees returns, the GIPS standards require firms to disclose if other fees are deducted in addition to the trading expenses. The firm must also reflect the name of the existing wrap fee/SMA sponsor in the sponsor-specific compliant presentation. Further, if the compliant presentation does not include net-of-fees returns, the firm must include a prominent disclosure stating that the sponsor-specific composite compliant presentation is only for the internal use of the names wrap fee/SMA sponsor.

In this situation, the firm should start with a net-of-fees return (which reflects or is reduced by the total wrap fee of 150 basis points). Because 50 basis points of the total 150 basis point wrap fee are attributable to the investment management fee, the remaining 100 basis points includes, among other expenses, those directly attributable to trading expenses. The firm may add back the 50 basis point investment management fee to the net-of-fees return to compute a gross-of-fees return.

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