CFA CFA level 3 study NotéCFA level 3 CFA level 3 CFA level 3 CFA level 3 finquiz item set questions, study session 18, reading 34

If MAA claims compliance with the standards, the total firm assets reported for each client’s portfolio, respectively is: A.?. It is situated in a city where compliance with the Global I

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FinQuiz Item-set ID: 9116

Questions 1(9117) through 6(9122) relate to Reading 34

Marino Asset Advisors (MAA) Case Scenario

Marino Asset Advisors (MAA) is a global firm which manages the accounts of both individuals

as well as institutional clients MAA is situated in the U.S and has branches operating in Europe and the Middle East Due to the diverse needs of each client, MAA has allocated the accounts to three of its European Branches; Starkey Associates, Marino Asset Advisors’ Trust Division, and Ginseng Management The characteristics and responsibilities of each branch are provided

below

Starkey Associates (SA):

SA is located in France and is responsible for managing individual client accounts SA maintains its own accountants, investment advisors, management and administration which are separate from the other branches including the head branch, MAA

Purchases and sale decisions for individual client accounts are made in accordance with a rule which prohibits advisors from incurring losses of no more than 10% of the current market value

on the purchases and sales

Marino Asset Advisor’s Trust Division (MAATD)

MAATD is located in Italy The division also manages individual client accounts and maintains

an organizational structure which is distinct from that of the other branches including the head branch

Domestic purchase and sale decisions are conducted independently by the branch’s investment advisors International trading decisions are however made in accordance with SA’s trading rule and accordingly sanctioned by the latter branch’s chief investment officer

Ginseng Management (GM):

GM is situated in England It is the only MAA international branch which manages institutional client accounts GM institutional clients include pension funds, endowments, life and non-life insurance firms, and foundations

The fund sponsors of the pension funds, endowments and foundations dictate the investable classes and constrain the maximum allowable percentage invested in any particular security by the branch Furthermore, any investments selected by GM’s investment advisors must be

approved by the fund sponsors of each client type in addition to the approval by the chief

investment officer at MAA

The investments for the life and non-life insurance firm portfolios are managed solely by the

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during the performance evaluation period This is often necessary due to the complex nature and circumstances of both these client types

In addition to the individual branches, MAA claims compliance with the GIPS standards The firm’s policies with respect to presenting and reporting investment performance information are outlined below

Policy 1: Should MAA or its branches undergo any functional or structure change, it will

have to apply the change retrospectively altering composite performance results for the period prior to the change

Policy 2: MAA and its branches ought to be verified to further improve its reputation in the

market

Policy 3: The firm must maintain records capturing the calculation methodologies used and

performances presented The records must be kept in electronic as well as in hard form such that it may be accessible by the relevant parties

Policy 4: The firm must value its composites in accordance with the occurrence of large

cash flows This valuation must be done on the last day of MAA’s corporate accounting year

Policy 5: The firm must obtain valuations from an independent source, switching to another

source in the event of higher valuation figure from the new source

MAA’s investment purchase and sale activity for three of its individual client portfolios is

provided below The corresponding trade dates have been provided as well as the composition for each client’s portfolio

Exhibit Investment Purchase/Sale Activity and Portfolio Composition for MAA’s clients Individual

Transaction

1 January 1, 2005: MAA has purchased

$0.05 million worth of Green Inc

5% of the portfolio includes non-discretionary, non-fee paying assets

2 March 15, 2004: MAA has purchased June 1, 2004 35% of the portfolio

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Individual

Transaction

$0.10 million worth of Generative

Corporation stock

June 1, 2004: Cash for the stock

purchase is paid

includes non-discretionary assets, fee-paying assets

40% of the portfolio includes discretionary, fee-paying assets

3 July 12, 2009: MAA has sold $0.01

million worth of venture capital firm

85% of the portfolio includes discretionary fee-paying, assets

*All assets included in each client’s portfolio are wholly managed by MAA and are included at fair value

FinQuiz Question ID: 9117

1 In the context of the information provided for MAA’s European branches, which of the

following branches will least likely be eligible to comply with the GIPS standards?

A SA and MAATD only

B MAATD only

C MAATD and GM

2 Which of the following branches will most likely be eligible to comply with the GIPS

standards?

A SA only

B GM only

C MAATD and GM

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3 In the context of the MAA’s compliance policies, which of the following statements is most

likely correct (assume that MAA’s policies are correctly stated in the context of the

standards)?

A Policies 2 and 4 are requirements of the GIPS standards

B Policy 1 is a recommendation; policy 5 is a requirement

C Policy 2 is a recommendation; policy 3 is a requirement

4 Which of the following policies if complied, will violate the GIPS standards?

A 1 and 2

B 1 and 5

C 3, 4 and 5

5 In the context of the trade activity information provided in the exhibit, which of the following portfolio(s) contains investments whose transaction recording date reflects a violation of the standards?

A 1, 2 and 3

B 1 and 3 only

C 3 only

6 If MAA claims compliance with the standards, the total firm assets reported for each client’s portfolio, respectively is:

A 25%; 40%; 85%

B 95%; 75%; 100%

C 100%; 100%; 100%

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Townville Associates (TA) Case Scenario

Townville Associates (TA) is a U.S investment management firm set up in Northern Morocco It

is situated in a city where compliance with the Global Investment Performance Standards (GIPS)

is gaining popularity TA was the first firm in the city to formally claim compliance with the standards back in 1999

Moroccan laws dictate all its investment management firms to undertake a complete verification

by Aaros and Mitchell, a regulatory body which has been sanctioned by the government as the sole body authorized to issue verification reports However, the U.S laws are quite lax on this affair and instead follow the relevant GIPS guidelines

In an effort to ensure it remains compliant with GIPS standards, the firm has documented its policies and procedures pertaining to performance reporting and calculation methodology

Several of the policies are highlighted below

Error Correction Policies:

The firm does not document policies and procedures used to identify and rectify errors

The treatment of external cash flows:

I Any time an external cash flow that is more than 15% of the most recent quarter’s fair value of aggregate individual client portfolios, flows into or out of the relevant portfolio, revaluation is required These portfolios are managed by several investment managers, each with a diverse investment style

II For periods prior to January 1, 2005 TA assumes all cash flows occurred at the midpoint

of the month and calculates returns accordingly

III For periods on or after January 1, 2005 inclusive of periods falling on or after January 1,

2010, TA calculates monthly returns by adjusting the returns for weighted external cash flows

Portfolio Valuations:

I TA values portfolios on the date of all large cash flows It has followed this policy from the date of its compliance

II Composites which contain indexed portfolios are to be valued on December 31

III Composites which contain semi-active and active portfolios are to be valued on the last date of the corporate accounting year, June 30

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Other policies:

I The firm calculates portfolio returns exclusive of the returns of cash and cash equivalents

II The firm reports gross of management fees Due to difficulties incurred in extracting trading expenses, the firm reports its returns net of investment management fees

III The firm accrues non-reclaimable withholding taxes on interest, dividends and capital gains and deducts reclaimable withholding taxes from portfolio returns

The valuations and cash flow activity for Patrick Travis’s portfolio, a firm client, for the most recent month of December are provided below

Exhibit Portfolio Valuations and External Cash Flow Activity for Travis’s portfolio

Fair Value 30 November $25,550,000

Cash contribution 5 December 1,250,000

Fair Value 5 December* 27,600,000

Cash contribution 22 December 800,000

Fair Value 22 December** 27,000,000

Fair Value 31 December 28,450,000

*The Fair value includes the investment of $1,250,000

** The Fair value includes the investment of $800,000

The cash flows occur at the end of the day and are available for investment the following day

7 In order to remain compliant with GIPS requirements and recommendations, TA is:

A required to undertake verification from any independent third party

B required to undertake verification from Aaros and Mitchell

C recommended to undertake verification from Aaros and Mitchell

8 Which of the following statements pertaining to TA’s error correction policies is most likely

correct?

A It violates the GIPS standards’ requirements

B It violates the GIPS standards’ recommendations

C It violates neither the GIPS standards’ requirements nor recommendations

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9 Does TA’s treatment of its external cash flows violate the requirements and

recommendations of the GIPS standards?

A No

B Yes with respect to I and III

C Yes with respect to III

10.The firm’s portfolio valuation policy is most likely:

A consistent with the requirements and recommendations of the standards

B inconsistent with the requirements and recommendations of the standards with respect to

II and III only

C inconsistent with the requirements and recommendations of the standards

11.Which of the firm’s ‘other policies’ least likely comply with the requirements and

recommendations of the standards?

A I and II

B I only

C I, II and III

12.Using the information for Travis’s portfolio provided in the exhibit, the return for the client’s

portfolio under the Modified Dietz method is closest to:

A 11.35%

B 3.17%

C 3.08%

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Bedrock Investment Associates (BIA) Case Scenario

Bedrock Investment Associates (BIA) is a U.S based investment management firm managing individual client portfolios The firm claims compliance with the Global Investment Performance Standards and is yet to be verified BIA is currently evaluating the sources from which it may undertake verification

Keene Gerard, CFA is a senior consultant serving the firm who has helped the firm in its

transition to full compliance Gerard has identified three potential sources which the firm may use in the verification process By utilizing any of these three sources, he states, the firm will be able to fulfill the standards’ requirements and recommendations pertaining to verification

Source 1: Horace Shaw, a management consultant, who had served BIA for over fifteen

years, has established his own consultancy firm and is a potential candidate

Source 2: Denise Advisors is a legal and regulatory advisory firm providing a variety of

legal advice to firms and is a potential candidate

Source 3: H.M & S is an external audit firm providing a variety of audit services to BIA

The audit firm has been selected as a potential candidate

The firm has recently hired a new investment manager The manager had previously worked for

a competing asset management firm and specializes in derivatives The firm has not previously used derivatives for any of its clients’ portfolios It would like to evaluate the implication of the introduction of such an investment strategy

In order to familiarize the manager with firm compliance policies, Gerard introduces the

manager to several of the firm’s policies pertaining to its composites

Policy 1: The firm calculates the composite returns by asset weighting individual portfolio

returns on a monthly basis since the firm’s inception

Policy 2: The firm sets a 10% tolerance limit for portfolios over which the firm has little or

no discretion If more than 10% of the portfolio assets are allocated to high P/E company stocks, the portfolio is defined as non-discretionary and prospectively removed from the composite at the start of the next performance measurement period

Policy 3: The firm occasionally constructs emerging market equity portfolios using a

simulation method The lack of data availability on emerging markets implies that the firm simulates the available security prices to establish an estimate of

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historical equity prices These portfolios are aggregated as part of the ‘Emerging Market composite’

Gerard also introduces the new manager to three investment managers currently serving the firm The details of these managers are summarized in the exhibit below

Exhibit BIA’s Investment Manager Styles for managers A, B and C

A A specializes in low dividend yield stocks

and low price-to-book value stocks

B B passively invests in large cap-blended

index funds

C C specializes in investing in companies

emerging from reorganization

The Asian-Pacific Fund is a composite managed by the firm The composite includes four

portfolios The relevant performance information for the composite is provided below for the month of March along with the external cash flow activity for each portfolio

Exhibit:

Performance Information and Cash Flow Activity for the Asian-Pacific Fund

Cash Flow Weighting Factor

Portfolio ($ Thousands)

Beginning assets (28

February) 134.60 99.23 113.22 110.10 457.15 External cash flows:

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13.Based on the sources identified by Gerard, which of the following source(s) can the firm use

to undertake verification in accordance with requirements and recommendations of the

standards?

A 1, 2 and 3

B 2 and 3

C 2 only

14.The most appropriate treatment of the new investment manager’s investment style is:

A creating a separate composite for the assets to be managed by the new investment

15.In the context of the firm policies introduced to the new investment manager, policies 1 and 3 represent:

A a compliance with the requirements and recommendations of the standards

B a violation of the requirements and recommendations of the standards with respect to policy 3 only

C a violation of the requirements and recommendations of the standards

16.In the context of policy 2 an increased allocation to high P/E stocks, in excess of 10% of the portfolio assets, necessitates:

A removing the portfolio from the composite at the start of the next performance

measurement period

B retaining the portfolio as part of the composite

C removing the portfolio from the composite immediately following the threshold breach

17.Based on the investment style information provided, to the new manager, the total number of

composites required for the three managers is closest to:

A 2

B 3

C 4

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