Lorenzo Edwards, CFA, is a member of the board of trustees for the Waldrop Enterprise pension fund. He was instrumental in the hiring of Dora Ray, CFA, as lead manager of the fund 5 years ago. During her tenure, Ray's long-term performance has been solid. The record shows that the fund has outperformed the relevant composite benchmark by 62 basis points, on average, during the period. Last quarter, she purchased shares of Baseco which proceed to fall sharply in value and brought down the overall performance of the fund. The board is now asking Edwards what has gone wrong. Which of the following is most correct with regard to the situation at Waldrop pension fund?
A) |
Edwards should tell the board that under the Prudent Man Rule, the investment risk for Baseco must be evaluated in a portfolio context, and not on a standalone basis. | |
B) |
As a CFA Charterholder, Edwards’ delegation of investment authority to Rey is in violation of the Code and Standards. | |
C) |
Edwards should tell the board that even though the Baseco investment did not perform as expected, there is no evidence that the Prudent Investor Rule has been violated. | |
The Prudent Investor Rule requires that the evaluation of an investment must be done with consideration to how it affects portfolio performance, and not in isolation. Thus, even though the addition of Baseco has had a negative impact on fund performance, there is no evidence that the Prudent Investor Rule has been violated. The Prudent Man Rule, which the Prudent Investor Rule has supplanted in most jurisdictions, evaluates each individual security in isolation—the Prudent Investor Rule takes a portfolio perspective. The Prudent Investor Rule allows for delegation of authority. In fact, delegation of authority can be viewed as required when specialized expertise is required. |