2019 CFA level 3 qbank reading 37 overview of the global investment performance standards answers

Study Session 19, Module 37.2, LOS 37.b Related Material SchweserNotes - Book 5 Question #4 of 103 Which of the following statements most accurately describes why the Global Investment P

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Question #1 of 103

Handley Asset Management (HAM), an investment management rm founded in 2000,

manages wrap and other non-wrap accounts HAM is preparing a wrap fee presentation for its

small-cap value composite The performance results in the presentation date back to 2002;

however, the rm began including wrap fee portfolios in the composite in 2006 Which of the

following statements is most accurate?

A) To be compliant with GIPS, HAM must disclose each period when an actual wrap

fee portfolio was not in the composite being identi ed

B) To be compliant with GIPS, HAM must exclude the wrap fee portfolios from its

presentation results

C) HAM’s presentation is compliant with GIPS as is and no change or disclosure is

required

Explanation

According to standard 8.A.2, when presenting composite returns in wrap fee/SMA compliant

presentations, the rm must disclose each period in which the composite does not contain

actual wrap fee portfolios

(Study Session 19, Module 37.8, LOS 37.p)

Related Material

SchweserNotes - Book 5

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In October of 1998, Alice Freeman, Georgeanne Pallence, and Mark Antonasanti formed FPA

Investment Management (FPA) All three of these individuals have enjoyed considerable success

in their careers Freeman is highly regarded for her expertise in the area of security analysis,

while Pallence and Antonasanti are well known for their exemplary management of

xed-income and equity portfolios, respectively

In the initial period after its inception, FPA only accepted high net worth clients, requiring a

minimum investment of $5 million In early 2000, however, FPA made the decision to expand its

client base by lowering its minimum investment requirement to $2 million In the e ort to

attract new clients and improve the information it provided for its current clients, FPA prepared

and distributed performance presentations that re ected the results of its three primary

investment styles That is, FPA presented performance results for an intermediate xed-income

composite, a broad equity composite, and a balanced composite The following list describes

some of the actions that FPA took when preparing its performance presentations

Action Number Description

1

All composites included only assets under management and were not linked with simulated or model portfolio

performance.

2 Accrual accounting and book values were used to compute xed-income returns.

3 Trading expenses were deducted prior to calculating returns.

4 Fee schedules were included in the presentations.

5 All actual fee-paying discretionary accounts were included in at least one of the three composites.

6 Asset-weighted composite returns were calculated using end- of-period weightings.

7

The performance of the equity portion of the balanced accounts, excluding cash, was combined with the equity composite results.

8 The S&P 500 index was used as the benchmark for all three

composite performance presentations.

9 Equal-weighted rates of return that adjust for cash ows were

used.

Which of FPA's actions indicated below are NOT in compliance with the Global Investment

Performance Standards (GIPS)?

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A) Actions 2 and 7.

B) Actions 3 and 6.

C) Actions 1 and 5.

Explanation

Listed below are the actions that are not GIPS-compliant and the reason for noncompliance

Action 2: Portfolio valuations must be based on fair value (not cost basis or book values) (Standard 1.A.2)

1, 2010, carve-out returns are not permitted to be included in single asset class composite returns unless the carve-out is actually managed separately with its own cash balance.

(Standard 3.A.7)

Action 8:

The total return for the benchmark (or benchmarks) that

re ects the investment strategy or mandate represented by the composite must be presented for each annual period If

no benchmark is presented, the presentation must explain why no benchmark is disclosed (Standard 5.A.6)

Action 9:

Time-weighted rates of return that adjust for cash ows must

be used Periodic returns must be geometrically linked.

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If DeLecrette Investment Management wishes to claim compliance with the Global Investment

Performance Standards (GIPS®) for their annual nancial report, the report must include which

of the following statements?

A) DeLecrette Investment Management claims compliance with the Global Investment

Performance Standards (GIPS®) and has prepared and presented this report in

B) DeLecrette Investment Management has prepared and presented this report in

compliance with the Global Investment Performance Standards (GIPS®)

C) DeLecrette Investment Management has prepared and presented this report in

compliance with the Global Investment Performance Standards of the CFA Institute

Explanation

To claim compliance, a rm must meet all required composite, calculation, disclosure, and

presentation Standards The rm is also encouraged to comply with all recommended

Standards and must comply with local laws and regulations Firms that claim compliance to

the GIPS may attach the following statement to performance presentations:

"[Insert name of rm] claims compliance with the Global Investment Performance Standards

(GIPS®) and has prepared and presented this report in compliance with the GIPS standards

[Insert name of rm] has not been indpendently veri ed."

Note that no statement about CFA Institute's involvement with the preparation or review of

the report is included

(Study Session 19, Module 37.2, LOS 37.b)

Which of the following statements most accurately describes why the Global Investment

Performance Standards (GIPS) were created? To:

A) meet the need for a single globally accepted set of investment performance

presentation standards

B) provide comparability of performance results among nations for which no

presentation guidelines currently exist

C) meet the need for a single globally accepted set of regulatory guidelines among

developed securities markets

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Recognizing the need for one globally accepted set of investment performance presentation

standards, CFA Institute sponsored and funded the Global Investment Performance

Standards Committee to develop and publish a single global standard by which all rms in all

countries calculate and present performance to clients and prospective clients

(Study Session 19, Module 37.1, LOS 37.a)

Jonathan Goolsby, a performance-reporting analyst at Handley Asset Management (HAM), is

preparing after-tax returns for inclusion in a performance presentation and needs to determine

the most appropriate method to incorporate the e ects of taxes on returns HAM employs

tax-aware portfolio management strategies If Goolsby uses the mark-to-liquidation method when

computing after-tax returns, the most likely e ect is that returns will be:

A) correctly stated.

B) understated.

C) overstated.

Explanation

The mark-to-liquidation method assumes all gains, whether recognized or not, are taxed each

period Under this method, taxes will be overstated and returns will be understated for a

portfolio that uses tax-aware strategies For example, HAM may delay selling a stock that has

had capital gains to delay taxes to a future period, thus increasing the returns of the

portfolio Under the mark-to-liquidation method, the returns would be calculated as if the

stock had been sold and the gains realized in that period Thus increasing taxes for that

period and decreasing returns

(Study Session 19, Module 37.9, LOS 37.t)

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Which of the following ratios is least likely to be shown in a performance presentation under

the GIPS provisions for private equity?

A) Total value to residual value.

B) Paid-in capital to committed capital.

C) Cumulative distribution to paid-in capital.

Explanation

The required ratios for presentation are: total value to paid-in capital, cumulative

distributions to paid-in capital, paid-in capital to committed capital, and residual value to

Which of the following is NOT a composite construction requirement under the Global

Investment Performance Standards (GIPS)?

A) Firm composites must be de ned according to similar investment objectives and/or

Under GIPS standard 3.A.2, composites must include only assets under management and

under Standard 3.A.3 rms may not link simulated or model portfolios with actual

performance Simulated, back-tested, or model portfolio results do not represent the returns

of actual assets under management and, thus, may not be included in composites

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Firm X currently claims compliance with the Global Investment Performance Standards (GIPS)

but uses settlement-date accounting Beginning January 1, 2005, what must Firm X do to remain

compliant?

A) Nothing, there is no change in requirements.

B) Begin using trade-date accounting and recalculate historical performance of its

composites

C) Begin using trade-date accounting.

Explanation

Standard 1.A.45 requires that rms use trade-date accounting for periods beginning January

1, 2005 These rms, however, will not be required to recalculate performance results that

were presented in accordance with the Standards for periods prior to January 1, 2005

(Study Session 19, Module 37.2, LOS 37.c)

Which of the following best describes the underlying principles upon which the Global

Investment Performance Standards (GIPS) are based?

A) Uniformity and consistent application of standards for the global regulation of the

securities industry

B) Fair and consistent application of a global set of regulatory requirements.

C) Full disclosure and fair representation of performance results.

Explanation

The GIPS standards are a set of voluntary standards based on the fundamental principles of

full disclosure and fair representation of performance results

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Which of the following lines of argument has/have been put forth to justify the establishment of

the Global Investment Performance Standards (GIPS)?

A) All of these choices are correct.

B) To enhance consistency in the use of the standards.

C) To increase the con dence that prospective and existing clients have in the

industry

Explanation

The GIPS are needed are to enhance consistency in performance presentation for

inter-country holdings, consistency in the use of standards, competition in global markets, and

investor con dence

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In October of 2008, Alice Freeman, Georgeanne Pallence, and Mark Antonasanti formed FPA

Investment Management (FPA) All three of these individuals have enjoyed considerable success

in their careers Freeman is highly regarded for her expertise in the area of security analysis,

while Pallence and Antonasanti are well known for their exemplary management of

xed-income and equity portfolios, respectively

In the initial period after its inception, FPA only accepted high net worth clients, requiring a

minimum investment of $5 million In early 2010, however, FPA made the decision to expand its

client base by lowering its minimum investment requirement to $2 million In the e ort to

attract new clients and improve the information it provided for its current clients, FPA prepared

and distributed performance presentations that re ected the results of its three primary

investment styles That is, FPA presented performance results for an intermediate xed-income

composite, a broad equity composite, and a balanced composite The following list describes

some of the actions that FPA took when preparing its performance presentations

Action Number Description

1

All composites included only assets under management and were not linked with simulated or model portfolio

performance.

2 Accrual accounting and book values were used to compute xed-income returns.

3 Trading expenses were deducted prior to calculating returns.

4 Fee schedules were included in the presentations.

5 All actual fee-paying accounts were included in at least one of the three composites.

6 Asset-weighted composite returns were calculated using end- of-period weightings.

7

The performance of the equity portion of the balanced accounts, excluding cash, was combined with the equity composite results.

8 The S&P 500 index was used as the benchmark for all three

composite performance presentations.

9 Equal-weighted rates of return that adjust for cash ows were

used.

Which of FPA's actions indicated below are NOT in compliance with the Global Investment

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A) Actions 6, 8, and 9.

B) Actions 1, 6, and 8.

C) Actions 2, 3, and 4.

Explanation

Listed below are the actions that are not GIPS-compliant and the reason for noncompliance

Action 2: Portfolio valuations must be based on fair value (not cost basis or book values) (Standard 1.A.2)

1, 2010, carve-out returns are not permitted to be included in single asset class composite returns unless the carve-out is actually managed separately with its own cash balance.

(Standard 3.A.7)

Action 8:

The total return for the benchmark (or benchmarks) that

re ects the investment strategy or mandate represented by the composite must be presented for each annual period If

no benchmark is presented, the presentation must explain why no benchmark is disclosed (Standard 5.A.6)

Action 9:

Time-weighted rates of return that adjust for cash ows must

be used Periodic returns must be geometrically linked.

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Which of the following regarding the GIPS real estate valuation principles is most accurate?

A) The GIPS recommend that real estate investments be valued externally by outside

sources

B) Fees paid to external valuators must not be based on resulting value.

C) The GIPS require the reporting of a single appraisal value.

Explanation

The amount of the external valuator's fee must not be based on the resulting value The GIPS

require(not recommend) that real estate investments be valued externally by outside

sources Although appraisal standards allow reporting values in ranges, the GIPS recommend

(not require) the reporting of a single value

(Study Session 19, Module 37.8, LOS 37.q)

Which of the following is NOT an important characteristic of how a rm de nes itself? The rm

de nition establishes the:

A) set of portfolios that must be included in at least one of a rm's composites.

B) entity to which the GIPS standards apply when a claim of compliance is made.

C) entity to which local securities laws apply when they exceed the GIPS requirements.

Explanation

When a rm claims compliance with GIPS, it must be compliant on a rm-wide basis The

de nition of the " rm" under the GIPS standards establishes the boundaries for what

constitutes rm assets, and the set of portfolios that must be included in at least one

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The Alexo Investment Management Group manages the investments for 30 retail clients Alexo

has full discretion over the investments of these clients' assets At the close of each day, the

excess cash in the clients' portfolios is swept into a money market fund Alexo does not manage

the money market fund, so it does not include the cash portion of the portfolio in its total

return performance calculations Alexo discloses its treatment of cash and cash equivalents in

its performance presentation

Which of the following statements regarding Alexo's compliance with the Global Investment

Performance Standards (GIPS) is CORRECT? Alexo is:

A) in compliance with the GIPS standards The Standards do not require excess cash

to be included in total return performance calculations unless the composite

B) not in compliance with the GIPS standards The Standards require cash to be

included in total returns calculations if the portfolio manager has control over the

C) in compliance with the GIPS standards The Standards do not require cash or cash

equivalents to be included in total return performance calculations unless the

Explanation

GIPS Standard 2.A.4 requires the returns from cash and cash equivalents held in portfolios to

be included in total-return calculations as long as the portfolio manager has control over the

amount of the portfolio that is allocated to cash This requirement stands even if the

manager does not actually control the investment of the cash, as is the case when it is held in

a money market sweep account

(Study Session 19, Module 37.3, LOS 37.d)

White and White Associates (WWA) is a money management rm that is planning to advertise

that it is GIPS compliant In the advertisement, WWA may include performance results:

A) only if WWA includes further information including the return of the composite's

benchmark

B) only if there has been third-party veri cation.

C) and does not have to include any additional information concerning performance.

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Guideline B.7 stipulates that any advertisement that includes performance results must also

include additional information such as the return of the composite's benchmark

(Study Session 19, Module 37.8, LOS 37.r)

As part of the veri cation process of a rm claiming GIPS compliance, the third party doing the

veri cation asks for a list and description of the rm's composites and a list of all portfolios

under the rm's management Which of these requests is (are) actually part of the preparation

The veri cation includes both of these requests as well as many others such as a sample of

performance presentations and marketing materials and all investment management

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Mesa Asset Management has claimed compliance with the Global Investment Performance

Standards (GIPS®) for many years and it is now January 1, 2011 Robert Flay, managing director

for Mesa wants to go beyond merely complying with the standards and wants to incorporate all

of the GIPS recommendations, particularly those dealing with presentation and reporting Flay

asks two of his performance analysts, Catherine Cora and Luigi Batali for suggestions as to how

Mesa can incorporate the recommendations

Cora:

"Mesa is permitted to link our noncompliant annual performance data from 1996-1999 to our GIPS compliant data, as long as we meet the disclosure requirements GIPS reporting recommendations suggest that we eliminate all non-compliant data after presenting the required 5 years of compliant historical performance."

Batali:

"Including a measure of the standard deviation of composite returns

is extra information that will provide prospective clients with information regarding the uctuation of composite returns over time."

After listening to their statements, Flay should:

A) agree with Cora, but disagree with Batali.

B) disagree with both Cora and Batali.

C) disagree with Cora, but agree with Batali.

Explanation

Flay should disagree with both Cora and Batali According to Standard 5.A.2 For periods

beginning on or after January 1, 2011, rms must present for each annual period:

a a Three-year annualized ex-post standard deviation using monthly returns for thecomposite and benchmark

b b An additional 3-year ex-post risk measure if management feels standard deviation isinappropriate The rm must match the periodicity of calculated returns used for thecomposite and benchmark

Note that this standard deviation measure would be di erent from the internal dispersion

measure that measures the standard deviation within the composite (relative to the average

composite return) Recommendations for presenting relevant composite-level risk measures

include: Standard 5.B.5 For each year that annualized composite and benchmark returns are

reported, the corresponding annualized standard deviation of monthly returns for the

composite and benchmark Standard 5.B.6 Additional ex-post composite risk measures

Although the recommendations do not suggest eliminating non-compliant data according to

Standard 5.B.8, Firms should comply with the GIPS for all historical periods, this indicates

rms should bring non-compliant data that is linked with compliant data into compliance

(Study Session 19, Module 37.6, LOS 37.l)

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Teaton Investment Management (TIM) has recently developed a proprietary prediction model

To test the model, TIM created a returns history for an equity value portfolio using hypothetical

assets and a back-tested asset allocation strategy TIM intends to include the simulated

portfolio results in its performance presentation Which of the following most accurately

describes TIM's compliance with the Global Investment Performance Standards (GIPS)? (Assume

that TIM is GIPS-compliant in all other areas) TIM is:

A) GIPS-compliant as long as it discloses the inclusion of simulated returns in its

performance presentation

B) GIPS-compliant if it includes the simulated portfolio in a composite that consists

solely of simulated portfolios

C) not GIPS-compliant because the standards do not permit the inclusion of simulated

portfolio results in performance presentations

Explanation

A rm may not include model performance results in its presentation and claim compliance

with GIPS Under GIPS Standard 3.A.2, composites must include only assets under

management and under Standard 3.A.3 rms may not link simulated or model portfolios with

actual performance Simulated, back-tested, or model portfolio results do not represent the

returns of actual assets under management and, thus, may not be included in composites

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A) The strategies should not overlap, so as to prevent portfolios falling under multiple

composite descriptions

B) Strategies should avoid having too many quali ers to prevent the manager from

having a large number of small composites

C) Strategies should be as fully de ned as possible so that portfolios within the

composites closely match each other

Explanation

Strategies may overlap, and portfolios may fall under two descriptions Strategies should

have a suitable number of quali ers (such as sector, style, benchmark or capitalization) –

having too many quali ers results in a large number of composites each containing too few

portfolios; having too few quali ers results in composites that are too broad

(Study Session 19, Module 37.4, LOS 37.g)

As countries adopt the Global Investment Performance Standards (GIPS), which of the following

is least likely to occur?

A) Existing and potential clients will be able to make fair and unambiguous

comparisons among investment rms

B) Competition in the global investment industry will be enhanced.

C) The trend toward cross border investments will decline.

Explanation

There is no reason to expect the level of international investing to decline as a result of the

adoption of a global set of performance standards If anything, international investing will

become more attractive as the credibility of reported performance results improves

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Which of the following investments is most likely to be covered by the real estate provisions of

the GIPS?

A) A commercial mortgage-backed security on a new o ce block.

B) A real estate investment trust.

C) A commingled investment in a group of residential properties.

Explanation

The general provisions of the GIPS would apply to REITs, any common stock, CMBSs and

many private debt investments The residential properties are the only investment listed that

would fall under the real estate provisions

(Study Session 19, Module 37.7, LOS 37.n)

The purpose of third-party veri cation:

A) is required by CFA Institute and the Securities and Exchange Commission (SEC).

B) may give a GIPS compliant rm a competitive advantage by making the claim to

GIPS compliance more credible

C) is required by CFA Institute but not the SEC.

Explanation

As of now, the only purpose of veri cation is to give the GIPS compliant rm a competitive

edge Prospective clients will have more con dence in the claim of GIPS compliance

(Study Session 19, Module 37.9, LOS 37.s)

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All of the following are reasons why the Global Investment Performance Standards (GIPS) are

necessary EXCEPT enhancing:

A) market e ciency.

B) competition in global markets.

C) investor con dence.

Explanation

The GIPS are necessary for the following reasons:

Enhancing consistency in performance presentation for inter-country holdings Thenancial markets are becoming increasingly more global in nature Because ofextensive inter-country holdings, standardization of presentation is vital for meaningfuland consistent performance presentations to occur

Enhancing consistency in the use of standards: Return calculation and performancepresentation guidelines, if present, vary greatly among countries Even when guidelinesexist in a county, they may not be extensively followed

Enhancing competition in global markets: The establishment of global standards placesmanagers from all countries on an equal footing in soliciting clients Managers fromcountries that previously had inferior standards will be taken more seriously whenpresenting their performance, while managers from countries with stronger standardswill not be penalized when competing in markets where inferior standards prevail

Enhancing investor con dence: Global standards increase the con dence thatprospective and existing clients have in the industry and allow them to make moremeaningful comparisons

Assume that on October 20, 2005, Firm X, which is in compliance with the Global Investment

Performance Standards (GIPS), acquired the assets for Firm Z, which is not in compliance with

the GIPS standards Until what date may Firm X continue to claim compliance with the

Standards before it must have the assets of Firm Z GIPS compliant?

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Under GIPS standard 5.A.48.b, if a compliant rm acquires or is acquired by a non-compliant

rm, the rms have one year to bring the non-compliant rm's acquired assets into

Which of the following reasons is least likely to explain why a portfolio has been moved from

one composite to another?

A) The portfolio size has recently fallen below the minimum threshold speci ed for the

“Japanese Value Equities above ¥500 million” composite

B) The rm has rede ned the composite, and the portfolio no longer falls under the

new de nition

C) The portfolio size has grown above £5 million and is more suitable to the “UK

Equities above £5 million” composite than the “UK Equities below £5 million”

i

Explanation

All of the suggestions could be valid reasons for moving a portfolio into or out from a

composite However, if a portfolio falls below a speci ed minimum and the drop is not likely

to be permanent, then the portfolio may remain in that composite in the short-term

(Study Session 19, Module 37.4, LOS 37.g)

In the presentation of a private equity fund, a rm reports an annualized since-inception (SI)

internal rate of return (IRR) net-of-fees but not gross-of-fees The net-of-fees returns are not

net of carried interest With respect to GIPS, the rm has:

A) made an error by not netting out carried interest but not by omitting returns

calculated gross-of-fees

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B) made an error by not reporting returns gross-of-fees but netting out carried

interest is not required so that is not an error

C) made an error by not reporting returns gross-of-fees and by not netting out carried

interest

Explanation

Standard 7.A.21: The GIPS provision for private equity presentation and reporting require

rms to present both the net-of-fees and the gross-of-fees annualized SI-IRR of the

composite for each year since inception Standard 7.A.46: The net-of-fees must be net of

carried interest, representing the percentage of pro ts on the fund's investments that

general partners receive, as well as investment management fees and transaction expenses

(Study Session 19, Module 37.10, LOS 37.u)

Bill Klecko, owner of the boutique money manager Klecko Investments, wants to claim GIPS

compliance He has hired Janice Walsh, a performance-presentation consultant, to make sure

Klecko Investments' performance presentation passes muster

As soon as Walsh arrives at the Klecko o ces, she is handed a sheet of paper showing the

rm's performance numbers Bill Klecko invites her to review the material at her own pace, talk

to anyone in the rm about the numbers, and prepare recommendations to improve the

presentation Before Walsh reads the document, Klecko tells her he is particularly concerned

about whether cash ows are properly accounted for She asks him how the rm accounts for

cash ows, and he tells her the following:

"We calculate returns adjusted for daily external cash ows, creating a time-weightedrate of return."

"Our returns estimate the e ects of cash ow as closely as possible, but do not exactly

re ect them."

"We adjust for dividend payments, but not interest income."

"We use the modi ed Dietz method for all portfolios initiated before January 2003 andthe modi ed IRR methods for all portfolios initiated in January 2003 or later

After hearing how the company calculates returns, Walsh asked for monthly data on one of the

portfolios to check the calculation Here is the data:

Date Market Value Cash Flow

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Walsh then retires to a vacant o ce to check out the performance review.

Klecko InvestmentsEquity Portfolios – Composite created Jan 1, 1999

Fiscal Year Composite Return Number of Portfolios Total Assets at End of Year

Performance calculated net of fees

Portfolios in the composite are asset-weighted quarterly

Klecko's equity composite excludes the results of equity hedge-fund operations, whichare managed by a separate department using its own investment style Portfolios in thecomposite may use futures or options to hedge risk, but do not use leverage

Valuations of equity investments are calculated based on trade date starting in 2006

Portfolios not collecting fees are excluded from the portfolio

Composite includes equity portions of blended equity and xed-income portfolios,including asset-weighted cash positions

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All numbers presented in U.S dollars.

After reviewing the presentation, Walsh again meets with Bill Klecko She identi es several

violations of GIPS, including:

The lack of a notation that composite de nitions are available upon request

Inclusion in the equity composite of carve-outs that are not managed separately withtheir own cash balance

Failure to list the minimum asset value for portfolio inclusion in the composite

The lack of a fee schedule and disclosure of what fees are deducted

No disclosure of dispersion of portfolio returns relative to the composite

To calculate returns using the modi ed Dietz method, subtract the beginning value from the

ending value, then subtract any cash ows Divide that value by the beginning value plus the

sum of each cash ow, multiplied by its weight To calculate the weight, subtract the date on

which the cash ow occurred from the number of days in the period, then divide by the

number of days in the period

January return = ($217,008 − $182,567 − $35,000) / ($182,567 + (31 − 16) / 31 ×

$35,000) = -0.28%

February return = ($85,183 - $217,008 – (-$140,000)) / ($217,008 + (28 − 8)/28 ×(-$140,000)) = 6.99%

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In order to meet the de nition of a rm, Klecko Investments must, in its performance

presentation:

A) include the hedge-fund division in the composites.

B) di erentiate the portfolio-management styles of the equity and hedge-fund

managers

C) do nothing The composite already satis es the GIPS requirements to be a rm.

Explanation

The composites appear to re ect all equity portfolios except hedge funds Since the hedge

funds are operated by di erent people using a di erent management style and by law are

marketed to a di erent group of clients, the remainder of Klecko Investments should

represent a rm in its own right But in order to establish this, Klecko must disclose why the

two units are di erent, speci cally the di erence in the way they manage assets and who

manages those assets

Which of the following characteristics did Walsh misidentify as a GIPS violation in Klecko

Investments' performance presentation?

A) Inclusion in the equity composite of carve-outs that are not managed separately

with their own cash balance

B) Failure to list the minimum asset value for portfolio inclusion in the composite.

C) The lack of a fee schedule and disclosure of what fees are deducted.

Explanation

Prior to January 1, 2010, carve-outs can be included in a composite as long as they are

reported with their share of the cash balance in the account from which they are pulled

Beginning January 1, 2010, it is a requirement that carve-outs included in a composite must

be managed separately with their own cash balance Both remaining characteristics

represent GIPS violations

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Walsh forgot to point out the GIPS violation involving:

A) failure to disclose treatment of withholding tax on capital gains.

B) frequency of portfolio asset-weighting.

C) lack of disclosure about scal year end.

Explanation

Monthly asset-weighting is a recommendation, not a requirement GIPS requires the use of a

standard reporting period, but does not require that nonstandard scal years be disclosed

But GIPS does require that rms disclose how they treat withholding taxes on dividends,

interest income, and capital gains

Under the Global Investment Performance Standards (GIPS), for periods beginning January 1,

2001, portfolio valuation must be based on:

A) market values and they must occur at least quarterly.

B) market values and must occur at least monthly.

C) cost basis and they must occur at least monthly.

Explanation

GIPS require portfolio valuation to be based on market values and valuation must occur at

least monthly for periods beginning January 1, 2001 For periods beginning January 1, 2010,

rms must value portfolios on the date of all large external cash ows, as of the calendar

month end or the last business day of the month

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Which of the following lines of argument has/have been put forth to justify the establishment of

the Global Investment Performance Standards (GIPS)?

A) Enhancing competition in global markets.

B) Both of these statements are correct.

C) Enhancing the consistency in performance presentation for inter-country holdings.

Explanation

The GIPS are needed are to enhance consistency in performance presentation for

inter-country holdings, consistency in the use of standards, competition in global markets, and

investor con dence

Eric Jicu, a highly successful portfolio manager of the EJ Fund, wishes to de ne the EJ Fund as a

rm under the Global Investment Performance Standards (GIPS®) standards Jicu is employed

by National Investing Alliance (NIA), a small regional brokerage rm Although he has disclosed

this information to his superiors at NIA, he would like to disclose his compliance for marketing

purposes by using his past actual performance results of ve years, which included two years of

simulated results Jicu also managed several fee-paying portfolios that were

non-discretionary under a di erent investment style Since the results of these non-non-discretionary

portfolios were highly successful, he wanted to include them into his EJ Fund composites for

compliance In his statement of compliance, Jicu wrote: "The EJ Fund claims compliance with the

Global Investment Performance Standards (GIPS®) and has prepared and presented this report

in compliance with the GIPS standards The EJ Fund has not been independently veri ed."

In de ning a rm, does the EJ Fund qualify as a rm under GIPS?

A) No, since to claim compliance NIA must be included.

B) Yes, since the EJ Fund is a separate entity it does qualify under GIPS.

C) No, since there is no mention that Jicu is incorporated he cannot qualify as a rm.

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No, the EJ Fund does not qualify as a rm for GIPS compliance In order to claim compliance,

NIA must be included In order for an investment rm to claim GIPS compliance, the GIPS

must be applied on a rmwide basis The key here is the de nition of the rm, because it

establishes the boundaries for what constitutes rm assets, and the set of portfolios that

must be included in at least one composite According to the GIPS, rms must be de ned as:

An investment rm, subsidiary, or division held out to clients or prospective clients

as a distinct business entity

In constructing the historical results of the EJ Fund, is Jicu correct in his approach?

A) No, because simulated results cannot be included with actual performance results.

B) Yes, because he included ve years of actual performance data.

C) No, because GIPS requires a minimum of ten years of performance before claiming

compliance

Explanation

Jicu is not correct because simulated results must not be included with actual performance

results Under GIPS, composites must include only assets under management and may not

link simulated or model portfolios with actual performance Simulated, back-tested, or model

portfolios results do not represent the returns of actual assets under management and may

not be included in composite performance results

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A) Yes, since fee-paying and non-fee-paying portfolios can be included in the same

composite as long as they have the same investment objectives

B) No, since fee-paying and non-fee-paying portfolios cannot be included in the same

portfolio

C) No, since the fee-paying discretionary portfolios are managed under a di erent

investment style as the non-fee-paying non-discretionary portfolios

Explanation

Jicu is not correct in the construction of composites Non-discretionary portfolios cannot be

included in a composite Non-fee-paying discretionary portfolios may be included in the

rm's composites, but if they are, rms are required to disclose the percentage of composite

assets represented by paying discretionary portfolios If the rm includes

non-fee-paying portfolios in its composites, they are subject to the same rules as fee-non-fee-paying

portfolios If a portfolio's status changes from discretionary to non-discretionary, the

portfolio may not be removed from a composite retroactively However, the portfolio must

be removed going forward Composites must include all actual fee-paying discretionary

portfolios All actual fee-paying discretionary portfolios must be included in at least one

composite By including all fee-paying discretionary portfolios in at least one composite, rms

cannot cherry-pick their best performing portfolios to present to prospective clients Firms

are permitted to include a portfolio in more than one composite, provided it satis es the

de nition of each composite

Firm composites must be de ned according to similar investment objectives and/or

strategies Composites should be de ned such that clients are able to compare the

performance of one rm to another Composites must be representative of the rm's

products and be consistent with the rm's marketing strategy Firms are not permitted to

include portfolios with di erent investment strategies or objectives in the same composite

Portfolios may not be moved into and out of composites except in the case of valid,

documented, client-driven changes in investment objectives or guidelines or in the case of

the rede nition of the composite

In the compliance statement, is Jicu correct is claiming compliance?

A) No, since Jicu is not in full compliance with GIPS.

B) No, since Jicu’s GIPS compliance statement is not written correctly.

C) Yes, since Jicu is in compliance with GIPS.

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No, Jicu may not claim compliance for the EJ Fund for all of the above reasons A rm must be

in full compliance with the GIPS in order to claim GIPS compliance There is no such thing as

partial GIPS compliance!

If the performance presentation does not meet all of the requirements of the GIPS, rms

cannot claim compliance with any exceptions

In January 2003, the Medusco Investment rm has decided to present its performance history

in compliance with the Global Investment Performance Standards (GIPS) Medusco was formed

on January 1, 1992, and has never before presented its performance results in compliance with

the GIPS standards Which of the following actions must Medusco take in order to claim GIPS

compliance?

A) Present GIPS-compliant performance results for the 5-year period from January 1,

1998, through December 31, 2002, and report ve additional years of

B) Present GIPS-compliant performance results for the 5-year period from January 1,

1998, through December 31, 2002

C) Retroactively comply with GIPS for periods after January 1, 2000, and report

non-GIPS-compliant performance results for the periods January 1, 1993, through

Explanation

In order to claim GIPS compliance, Medusco must present at least ve years of annual

investment performance results that are compliant with GIPS Medusco may, at its discretion,

add an additional ve years of results that are not GIPS-compliant to their ve-year compliant

history with a disclosure of the period of noncompliance and an explanation of why the

presentation for these periods is not GIPS compliant (Standard 4.A.15 and 5.A.1.a)

(Study Session 19, Module 37.6, LOS 37.k)

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Which of the following is least likely a GIPS valuation requirement?

A) Firms must disclose if their valuation hierarchy di ers from the GIPS recommended

hierarchy

B) Firms must disclose their portfolio valuation policies and hierarchy.

C) If local laws or regulations related to valuation con ict with GIPS, rms are required

to follow the more strict of the law or standard

Explanation

If local laws or regulations related to valuation con ict with GIPS, rms are required to follow

the local laws or regulations and disclose the con ict The other two answer choices are both

GIPS valuation requirements

Which of the following actions are recommended (not required) for claiming compliance with

the Global Investment Performance Standards?

A) Accrual accounting should be used for dividends (as of the ex-dividend date).

B) If a rm sets a minimum asset level for portfolios to be included in a composite, no

portfolios below that level can be included in the composite

C) Total return, including realized and unrealized gains plus income must be used.

Explanation

This is a recommended action step while the remainder are required

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McGregor Investment Management promotes itself as a xed-income investment management

rm The vast majority of the portfolios it manages are xed-income portfolios McGregor does,

however, manage a few portfolios, utilizing a growth equity investment strategy, but the rm

has no intention of ever promoting this strategy Under the Global Investment Performance

Standards (GIPS), must these portfolios be included in a composite?

A) No, because the rm does not normally manage portfolios to a growth equity

strategy and is not planning to promote it

B) Yes, because the portfolios are managed to a widely recognized investment

strategy

C) Yes, because the portfolios are discretionary and fee paying.

Explanation

The GIPS Standards require that all actual fee-paying discretionary portfolios are included in

at least one composite It does not matter if the rm ever plans to promote the particular

strategy to which a portfolio is being managed, if the portfolio is fee-paying and

discretionary, it must be included in at least one composite Thus, McGregor must include the

growth equity portfolios in at least one of its composites

(Study Session 19, Module 37.4, LOS 37.f)

Stroud Investments is preparing a wrap fee presentation for a potential wrap fee client

According to the GIPS standards, the investment performance contained in the presentation

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According to standard 8.A.6, performance presentations to potential wrap fee clients must be

net of the entire wrap fee

(Study Session 19, Module 37.8, LOS 37.p)

Of the four dispersion measures, only the interquartile range ignores the values of outliers

This measure provides the value of the second and third quartiles, and is not a ected by

individual portfolio results within the top and bottom quartiles

(Study Session 19, Module 37.6, LOS 37.m)

For private equity, valuations must be prepared:

A) at least quarterly, but monthly valuations are recommended.

B) at least annually, but quarterly valuations are recommended.

C) annually only, and the lack of liquidity of private equity prohibits quarterly

valuations

Explanation

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Standard 7.A.2 valuations must be prepared at least annually Standard 7.B.1 is a

recommendation stating that Private Equity investments should be valued at least quarterly

Consider the total quarterly returns for the growth and income composite of Zest Investment

Management (ZIM): Q1 = 3.20%, Q2 = 4.25%, Q3 = 3.95%, Q4 = 3.35% What is the appropriate

total annual return under the calculation methodology under the Global Investment

A) 14.480%.

B) 15.58%.

C) 14.75%.

Explanation

GIPS Standard 2.A.2 requires periodic returns to be geometrically linked Thus, the annual

return is computed as:

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The calculation of capital return under the GIPS provisions for real estate is performed by

dividing a measure of return by capital employed Beginning with the change in value of the

real estate (and cash), how would the calculation of return account for capital expenditures,

nonrecoverable expenses, and sales proceeds?

Capital Expenditures Nonrecoverable

Expenses Sales Proceeds

Explanation

Capital return is calculated by dividing a return measure by capital employed The return

measure equals the change in value during the period (i.e ending market value less

beginning market value) minus capital expenditures plus sales proceeds Nonrecoverable

expenses would be deducted from income return

(Study Session 19, Module 37.7, LOS 37.o)

B) a rm is required to present, at minimum, ten years of annual investment

performance that is compliant with GIPS

C) portfolios must be valued at least monthly for periods beginning January 1, 2001.

Explanation

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GIPS require that rm's present, at minimum, ve years (not ten) of annual investment

performance that is compliant with GIPS After a rm presents 5 years of compliant history, it

must annually add each subsequent year up to a total of 10 years Note that GIPS also

require monthly valuation after January 1, 2001

Graham and Crickenburg Associates is a large money-management company The rm has

been in existence for four years, and Graham and Crickenburg Associates has two divisions

which are separate legal entities One division in the company handles all the individual client

accounts and one division handles all the corporate accounts The co-owners and chief

executive o cers, Charles Graham and Kevin Crickenburg, are considering the advantages of

conforming to the Global Investment Standards, GIPS® Graham thinks that it may be more

cost e ective to only make the individual client division GIPS compliant Graham thinks this is

acceptable to only make one part of the rm GIPS compliant if they sign a letter of intent that

they will make the entire company GIPS compliant within a year Crickenburg says that it is not

possible, because the entire company must become GIPS compliant or not at all They resolve

to investigate the issue later, and Graham and Crickenburg move on to examining the

requirements for input data and calculations

Graham and Crickenburg note that they have records concerning the returns of portfolios in

both divisions going back since the rm began The returns were calculated monthly, used

accrual accounting for xed-income assets, used accrual accounting for dividend-paying stocks,

and used settlement-date prices They have all the nal returns for the portfolios in hard copy

form Most of the raw data pertaining to the returns of the assets in the portfolios and

calculation methods have been lost This was because Graham and Crickenburg threw away the

hard copy of the raw data A computer virus destroyed many of the raw data les Graham and

Crickenburg discuss the adequacy of the data for GIPS compliance Graham says that only

having the returns data is su cient since the company had an external CPA go over the books

each year Crickenberg says that having records going back four years is su cient

Graham and Crickenburg Associates has a wide variety of individual clients Some of the clients

are very conservative, and some are very aggressive Two separate clients are so conservative

that, four years ago, they stipulated that their entire portfolio simply be invested equally across

US Treasury strips with two, four, six and eight years to maturity As each group matures, as the

rst set did two years ago, it would be rolled over into the eight years to maturity strips again

These clients put their money with Graham and Crickenburg Associates so that the company

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would take care of the rollover, the paperwork, and computing the tax liability The clients pay a

fee for this service

The portfolios of the more aggressive clients were managed by Jill Laporte, CFA, for the rst two

years of the existence of Graham and Crickenburg Associates The portfolios she managed had

higher returns and lower standard deviations than their respective indexes for those rst two

years After two years, Laporte left the rm and took a small number of the clients with her

After she left, the aggressive portfolios that had been under her management and remained

with Graham and Crickenburg Associates underperformed their respective indexes

Graham and Crickenburg Associates is an American based rm with most of its clients living or

doing business in the United States Some of the clients are foreign, however, and have the

majority of their holdings in foreign assets Graham and Crickenburg have been computing the

returns of these portfolios in their respective domestic currencies The portfolios denominated

in foreign assets use foreign benchmarks, naturally, and some of the indexes used as

benchmarks report returns net of taxes Graham and Crickenburg discuss the extent of the

details they must report with respect to these facts Graham says that they must disclose the

currency used to express the performance of each portfolio Crickenburg says they do not have

to disclose details concerning indexes reporting returns net of taxes

In Graham's and Crickenburg's discussion concerning whether to make only a portion of the

company GIPS compliant, they each gave an opinion concerning the possibility of making only

one division GIPS compliant and a reason supporting that opinion With respect to both the

opinion and reason:

A) both are incorrect.

B) only one is correct.

C) both are correct.

Explanation

Because the subdivisions are distinct business entities, the company can de ne each of its

divisions as a separate rm for the sake of GIPS compliance Thus, one division can be GIPS

compliant while the other is not There need not be an intent to make all divisions GIPS

compliant in such an instance

(Study Session 19, Module 37.4, LOS 37.i)

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With respect to the historical input data, which of the following are impediments to Graham

and Crickenburg associates becoming GIPS compliant? The returns:

A) of the dividend-paying stocks are calculated using accrual accounting.

B) are calculated using settlement-day prices.

C) are calculated monthly and on the date of all large cash ows.

Explanation

As of January 2005, trade-date prices must be used (Standard 1.A.5) Monthly calculations and

accrual accounting for xed-income assets is required Accrual accounting for

dividend-paying stocks is recommended

(Study Session 19, Module 37.4, LOS 37.i)

With respect to the historical input data, the existence of only the portfolio returns data, and

the fact that data only goes back four years: Graham and Crickenberg both state the data is

su cient Graham says only having the portfolio returns is su cient, and Crickenberg says only

having four years is su cient With respect to these statements:

A) both are incorrect.

B) only Graham is incorrect.

C) only Crickenberg is incorrect.

Explanation

Graham was incorrect because the supporting data must be maintained (Standard 1.A.1)

Crickenberg was correct in that the rm has only been existence for four years, so four years

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