Reading 49: Global Investment Performance Standards Los l~Q1-4

Investment, required, standards, reporting, including

LOS l: State the requirements and recommendations of the GIPS standards with respect to presentation and reporting, including the required timeframe of compliant performance records, annual returns, composite market values, and benchmarks.

Q1. 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	A fee schedule was 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 4 and 6.

B) Actions 3 and 9.

C) Actions 2 and 8.

Q2. Which of the following is NOT a Global Investment Performance Standards (GIPS) presentation and reporting requirement?

A) A measure of the dispersion of individual component portfolio returns around the aggregate composite return.

B) Performance for periods of less than one year must be annualized.

C) The composite creation date.

Q3. Assume that on January 1, 2005, a 15-year old firm with no Global Investment Performance Standards (GIPS) compliant performance history wishes to claim compliance with the GIPS standards. Which of the following accurately reflects the appropriate action for the firm to take?

A) Comply with GIPS for the year beginning January 1, 2004, and report four additional years of performance history (five total) and disclose why the earlier years are not GIPS compliant.

B) Comply with the GIPS standards for the 5-year period January 1, 2000, through December 31, 2004, and report five additional years of non-GIPS-compliant performance and disclosure of why the performance in the earlier years is not GIPS compliant.

C) Comply with GIPS for the year beginning January 1, 2004, and report nine additional years of performance history (ten total) and disclose why the earlier years are not GIPS compliant.

Q4. In January 2003, the Medusco Investment firm 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 five additional years of non-GIPS-compliant performance with a disclosure explaining why the performance in the earlier years is not GIPS-compliant.

B) Retroactively comply with GIPS for periods after January 1, 2000, and report non-GIPS-compliant performance results for the periods January 1, 1993, through December 31, 1999, with a disclosure explaining why these earlier years are not GIPS-compliant.

C) Present GIPS-compliant performance results for the 5-year period from January 1, 1998, through December 31, 2002.