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CIPM Level I 2025 GIPS Standards: Construction Rules Simplified

CIPM Level I 2025 GIPS Standards: Construction Rules Simplified
CIPM Level I 2025 GIPS Standards: Construction Rules Simplified

The Global Investment Performance Standards (GIPS) are a foundational element within the CIPM Level I 2025 curriculum, ensuring transparent, consistent, and ethical presentation of investment performance to clients. Understanding GIPS composite construction rules is critical for accurate reporting, fair representation, and passing your CIPM exam with confidence. This article simplifies these rules with practical examples and updated 2025 context, preparing you for your performance measurement role and CIPM exams.


What Are Composites in GIPS? CIPM Level I 2025 GIPS Standards

A composite is a grouping of individual portfolios that are managed according to a similar investment strategy or mandate. GIPS requires firms to include all actual, fee-paying, discretionary portfolios in at least one composite to prevent cherry-picking performance. Composites: CIPM Level I 2025 GIPS Standards

  • Reflect consistent application of a strategy across clients.

  • Enable clients and prospects to evaluate a firm’s performance for a specific strategy.

  • Promote comparability across firms and time periods.


Key Rules for Composite Construction


1. Inclusion and Exclusion

  • Include portfolios in a composite at or before the portfolio’s first full month under management.

  • Exclude portfolios when they become non-discretionary or change strategy, effective at the time of change.

  • Inclusion/exclusion should not be delayed to manipulate returns.


2. Consistent Composite Definitions

  • Composites must have a clear, written definition detailing investment objectives, strategies, and constraints.

  • If changes are made to the composite definition, these changes and the dates they occurred must be documented and disclosed.


3. Portfolio-Level Requirements

  • All fee-paying, discretionary portfolios must be included in at least one composite.

  • Non-discretionary and non-fee-paying portfolios are excluded unless they meet specific disclosure rules.


4. Return Calculations

  • Time-Weighted Return (TWR) is the default for composite reporting.

  • Money-Weighted Return (MWR) is permitted for portfolios where the manager controls the timing of cash flows, such as private equity or real estate.

  • Returns must be calculated and presented consistently across all portfolios within the composite.


5. Valuation and Frequency

  • Portfolios must be valued at least monthly and whenever large cash flows occur if practical.

  • Use fair value as defined by GIPS guidance for all valuations to ensure consistency.


Avoiding Common Mistakes in Composite Construction


  1. Cherry-Picking Portfolios

    • Excluding underperforming portfolios from composites violates GIPS.

    • Solution: Systematically include all eligible portfolios in relevant composites without exception.

  2. Incorrect Timing of Inclusion/Exclusion

    • Delaying inclusion or removal to influence returns misrepresents performance.

    • Solution: Use a structured system to align inclusion/exclusion with the effective strategy change date.

  3. Inconsistent Composite Definitions

    • Altering definitions without documentation can create confusion and compliance issues.

    • Solution: Clearly record any changes and communicate to clients and verification professionals.

  4. Incorrect Return Type Usage

    • Applying TWR to portfolios where MWR is appropriate (or vice versa) can mislead clients.

    • Solution: Understand when TWR or MWR is appropriate and apply consistently.

  5. Incomplete Fee Disclosure

    • GIPS requires transparency on whether returns are gross or net of fees and how fees are applied.

    • Solution: Disclose all fee structures and present net-of-fees performance where applicable.


Updates Relevant for 2025: OCIO Portfolios


The 2025 GIPS updates emphasize OCIO (Outsourced Chief Investment Officer) portfolios:

  • Firms managing OCIO portfolios must create composites based on client mandates (liability-driven vs. total-return strategies).

  • Asset allocation disclosures, including private market and hedge fund exposures, are mandatory.

  • TWR remains the required method even for portfolios with private market investments.

  • At least five years of compliant performance history must be presented, building up to ten years over time.

These updates reflect the trend towards multi-asset, liability-driven investing, ensuring GIPS remains aligned with modern fiduciary management practices.


Practical Example for Exam Clarity


Scenario: A firm begins managing a new discretionary, fee-paying portfolio on March 15, 2025, under an existing global equity strategy.

  • Action: The portfolio must be included in the global equity composite for the full month of March 2025.

  • Reporting: Since the portfolio was not managed for the entire month, report non-annualized returns for March 2025.

  • Removal Scenario: If the client changes the mandate to a balanced strategy on August 10, 2026, the portfolio should be removed from the global equity composite effective immediately upon the strategy change.


Tips for CIPM Level I Exam Success


Use Definitions Clearly: Begin essay answers by defining terms like “composite”, “TWR”, and “discretionary”.

Apply the Rules to Examples: When answering questions, demonstrate understanding through practical scenarios.

Memorize Key Inclusions: Remember, all actual, fee-paying, discretionary portfolios must be included in at least one composite.

Know When to Use TWR vs. MWR: TWR is the standard; MWR is only used when the manager controls cash flows.

Understand 2025 Updates: Highlight your awareness of OCIO portfolio composite requirements if applicable.

Be Structured: Use a logical format (Introduction, Rules, Example, Conclusion) in essays.



Mastering GIPS composite construction is critical for passing CIPM Level I and for building credibility in your investment performance career. By following GIPS rules—ensuring accurate inclusion and exclusion, consistent return methodology, and complete transparency—you ensure your reporting aligns with industry best practices while building trust with clients.



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