Reading 49: Global Investment Performance Standards Los e~Q1-6

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LOS e: Summarize and justify the requirements of the GIPS standards with respect to return calculation methodologies, including the treatment of large external cash flows, cash and cash equivalents, and fees and expenses.

Q1. Achieving comparability among investment management firms’ performance presentations requires uniformity in methods used to calculate returns. Which of the following statements concerning Global Investment Performance Standards (GIPS) calculation methodology is FALSE?

A) In both the numerator and the denominator, the market values of fixed-income securities must include accrued income.

B) If a firm sets a minimum asset level for portfolios to be included in a composite, no portfolios below that asset level can be included in that composite.

C) Performance must be calculated prior to the deduction of all trading expenses.

Q2. 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 is TRUE regarding Alexo’s compliance with the Global Investment Performance Standards (GIPS)? 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 consists primarily of cash or cash equivalents.

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 amount of the portfolio that is allocated to cash.

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 portfolio manager has control over the management of the cash or cash equivalents.

Q3. Judy Picoo, CFA, a portfolio manager for the JP Fund, needed to compute her portfolio performance results for the 2003 first calendar quarter in compliance to GIPS. The following monthly results and information were available:

January 2003: +2.3%

February 2003: –1.0%

March 2003: The market value of her portfolio was $50 million on February 28, 2003, and $51.5 million on March 31, 2003. The portfolio did experience a redemption of $500,000 on March 15, 2003

Calculate the return for the month of March 2003 using the modified Dietz method.

A) 2.01%.

B) 3.02%.

C) 4.02%.

Q4. Calculate the quarterly return for the first quarter of 2003.

A) 1.10%.

B) 5.35%.

C) 4.47%.

Q5. 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 fixed-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 effort to attract new clients and improve the information it provided for its current clients, FPA prepared and distributed performance presentations that reflected the results of its three primary investment styles. That is, FPA presented performance results for an intermediate fixed-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 fixed-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& 500 index was used as the benchmark for all three composite performance presentations.
9	Equal-weighted rates of return that adjust for cash flows were used.

Which of FPA’s actions indicated below are NOT in compliance with the Global Investment Performance Standards (GIPS)?

A) Actions 6, 8, and 9.

B) Actions 1, 6, and 8.

C) Actions 2, 3, and 4.

Q6. 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 Performance Standards (GIPS)?

A) 15.58%.

B) 14.48%.

C) 14.75%.