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

2009, Investment, standards, including

LOS f: State the requirements and recommendations of the GIPS standards with respect to composite return calculations, including methods for asset-weighting portfolio returns.

Q1. Jessica Yee, a portfolio manager for the National Investing Alliance (NIA), wants to create a high yield composite portfolio for marketing purposes from several other portfolios. The portfolios to be drawn from include a high yield bond portfolio, a convertible debt portfolio, and a large cap equity growth portfolio. In the composite she did not wish to include any historical results from terminated portfolios, nor did she feel it was important to include the cash associated with these portfolios (since the cash was managed by another department of NIA). Yee believed that hedging was a very important element of her investment philosophy in these volatile markets, so she delegated this responsibility to another department within NIA, but she did not wish to include their hedging results with her composite results. Yee wants to be able to claim compliance under Global Investment Performance Standards (GIPS^?).

Which of the following statements describes how Yee should approach the formation of the composite?

A) The large cap equity growth portfolio must not be included in the composite.

B) Since the large cap equity growth portfolio is part of the overall portfolios managed by NIA it can be included in the same composite with the high yield bond and convertible debt portfolios.

C) The high yield bond portfolio and convertible debt portfolio should be in different composites since they represent different investment objectives.

Q2. With respect to the exclusion of terminated portfolios, is her approach correct?

A) Yee should include the results of terminated portfolios.

B) Terminated portfolios are allowed to be dropped from composites when the portfolio is no longer actively managed.

C) Yee should include the results of terminated portfolios through the date the portfolio was last managed.

Q3. Which of the following best describes the cash portfolio results with respect to the overall portfolio results?

A) If a third party entity manages the cash component of the portfolio it is not necessary to include the cash returns in the overall portfolio results.

B) The returns from the cash component of Yee’s portfolio must be included in the overall portfolio results.

C) Since the cash component of the portfolio is managed by another department it is not necessary to include it in the overall portfolio results.

Q4. Is Yee correct in excluding the hedging activity results with her portfolio results?

A) Yes, since the use of hedging is negligible the hedging results need not be included in the overall portfolio results.

B) No, given Yee’s investment philosophy, the hedging results should be included in her portfolio results.

C) Yes, since Yee is not actually managing the hedging activities she should not include these results into the overall portfolio results.

Q5. Which of the following statements about the Global Investment Performance Standards (GIPS) is FALSE?

A) When returns are calculated net of taxes, only those taxes that are not later reclaimed should be included.

B) Performance must be calculated after deducting trading costs.

C) Composites must be asset weighted using end-of-period weightings.

Q6. 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.