Advisors, Inc., is in the process of adopting the Global Investment Performance Standards (GIPS). The managers of the firm are combining the results of fee-paying discretionary portfolios into composites for reporting purposes. For purpose of comparison, each fee-paying discretionary portfolio must be included in at least:
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A composite is a group of portfolios with similar investment strategies and objectives. The grouping is done so a comparison can be done between the portfolios in each composite. A portfolio must be included in at least one composite for compliance with the GIPS.
McGregor Investment Management promotes itself as a fixed-income investment management firm. The vast majority of the portfolios it manages are fixed-income portfolios. McGregor does, however, manage a few portfolios, utilizing a growth equity investment strategy, but the firm has no intention of ever promoting this strategy. Under the Global Investment Performance Standards (GIPS), must these portfolios be included in a composite?
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The GIPS Standards require that all actual fee-paying discretionary portfolios are included in at least one composite. It does not matter if the firm 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.
Viroqua DeSoto, CFA, is reading a discussion in an online forum about the construction and purpose of composites in performance reporting. She finds these statements from participants:
Statement 1: The purpose of composites is to let investors know how well a firm has performed managing different types of securities or investment strategies.
Statement 2: A managed portfolio should have a performance history of at least one year before the firm assigns it to a composite.
With respect to both statements:
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DeSoto should agree with Statement 1 but disagree with Statement 2. Reporting on the performance of composites gives clients and prospects information about the firm’s success in managing various types of securities or investment styles. The firm should identify which composite each managed portfolio will be included in before the portfolio’s performance is known, to prevent the firm from including portfolios selectively and artificially creating composites with superior returns.
Jones, Inc., is attempting to qualify for Global Investment Performance Standards (GIPS) compliance. Regarding mandatory disclosures, which of the following disclosures will be insufficient and thus prevent Jones, Inc., from claiming compliance?
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Jones must disclose total firm assets each period, not assets under active management. The definition of the firm, the disclosure of the firm’s composites, and the disclosure regarding non-fee paying portfolios are all appropriate.
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