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CurrentEffective: 1 July, 2021Categories: Calculation Methodology, Pooled FundsSource: GIPS Standards Technical Committee
We manage a pooled fund whose net returns are based on net asset values (NAVs). The NAV-based returns reflect the deduction of all of the pooled fund’s fees and expenses. The pooled fund is included in a composite. Can we “gross up” the pooled fund’s net returns to calculate gross-of-fees returns that can be included in the composite calculation?
When calculating gross-of-fees returns starting from pooled fund net returns, firms are allowed to add back all of the fees and expenses that were deducted when calculating the net return (e.g., investment management, custody, transfer agent, share registration, marketing, and regulatory fees), except for transaction costs. When grossing up returns, firms may use the actual fees and expenses or the total expense ratio, if the total expense ratio includes all fees and expenses and does not include transaction costs. Firms may also add back model fees and expenses as long as the gross-of-fees return that is calculated is equal to or lower than the gross-of-fees return that would have been calculated if actual fees and expenses were used. Examples of model fees and expenses are the lowest investment management fee charged to any share class of the pooled fund or the portfolio included in the composite, or the smallest total expense ratio of any share class of the pooled fund.
When calculating net-of-fees returns for inclusion in a composite calculation, firms are allowed to add back to the pooled fund net return all fees and expenses except for transaction costs and investment management fees.
Firms must take care when grossing up pooled fund net returns. Adding back fees and expenses that were not deducted when calculating the net return would result in overstating returns. If using a total expense ratio to gross up returns, firms must ensure that the total expense ratio used is appropriate for the respective period being calculated. If the firm has expenses related to dividends and interest on securities sold short, it must use the expense ratio that excludes dividends and interest on securities sold short when grossing up pooled fund net returns. Also, when an expense cap is in place, firms must use the total expense ratio that reflects the expense cap.