Q11. Which of the following is NOT a Global Investment Performance Standards (GIPS) input data requirement?

A)   For periods beginning January 1, 2005, firms must use settlement date accounting.

B)   For periods beginning January 1, 2001, portfolios must be valued at least monthly.

C)   Portfolio valuations must be based on market values (not cost basis or book values).

Q12. Bill Klecko, owner of the boutique money manager Klecko Investments, wants to claim GIPS compliance. He has hired Janice Walsh, a performance-presentation consultant, to make sure Klecko Investments’ performance presentation passes muster.

As soon as Walsh arrives at the Klecko offices, she is handed a sheet of paper showing the firm’s performance numbers. Bill Klecko invites her to review the material at her own pace, talk to anyone in the firm about the numbers, and prepare recommendations to improve the presentation. Before Walsh reads the document, Klecko tells her he is particularly concerned about whether cash flows are properly accounted for. She asks him how the firm accounts for cash flows, and he tells her the following:

• “We calculate returns adjusted for daily external cash flows, creating a time-weighted rate of return.”
• “Our returns estimate the effects of cash flow as closely as possible, but do not exactly reflect them.”
• “We adjust for dividend payments, but not interest income.”
• “We use the modified Dietz method for all portfolios initiated before January 2003 and the modified IRR methods for all portfolios initiated in January 2003 or later.

After hearing how the company calculates returns, Walsh asked for monthly data on one of the portfolios to check the calculation. Here is the data:

Walsh then retires to a vacant office to check out the performance review.

Notes:

• Monthly returns, portfolio valuations, and calculation methodology available upon request.
• Performance calculated net of fees.
• Portfolios in the composite are asset-weighted quarterly.
• Klecko’s equity composite excludes the results of equity hedge-fund operations, which are managed by a separate department using its own investment style. Portfolios in the composite may use futures or options to hedge risk, but do not use leverage.
• Valuations of equity investments are calculated based on trade date starting in 2006.
• Portfolios not collecting fees are excluded from the portfolio.
• Composite includes equity portions of blended equity and fixed-income portfolios, including asset-weighted cash positions.
• All numbers presented in U.S. dollars.

After reviewing the presentation, Walsh again meets with Bill Klecko. She identifies several violations of GIPS, including:

• The lack of a notation that composite definitions are available upon request.
• Inclusion in the equity composite of carve-outs that are not managed separately with their own cash balance.
• Failure to list the minimum asset value for portfolio inclusion in the composite.
• The lack of a fee schedule and disclosure of what fees are deducted.
• No disclosure of dispersion of portfolio returns relative to the composite.

Using the modified Dietz method, the portfolio return for the March 2005 quarter is closest to:

A)   28.48%.

B)   27.27%.

C)   28.99%.

Q13. In order to meet the definition of a firm, Klecko Investments must, in its performance presentation:

A)   do nothing. The composite already satisfies the GIPS requirements to be a firm.

B)   include the hedge-fund division in the composites.

C)   differentiate the portfolio-management styles of the equity and hedge-fund managers.

Q14. Regarding accounting for cash flows, Bill Klecko should be most concerned about the firm’s:

A)   treatment of dividends and interest.

B)   adjustment for daily external cash flows.

C)   lack of ability to exactly reflect cash flows.

Q15. Which of the following characteristics did Walsh misidentify as a GIPS violation in Klecko Investments’ performance presentation?

A)   Failure to list the minimum asset value for portfolio inclusion in the composite.

B)   Inclusion in the equity composite of carve-outs that are not managed separately with their own cash balance.

C)   The lack of a fee schedule and disclosure of what fees are deducted.

Q16. Klecko Investments violated GIPS by:

A)   failing to provide a risk measure for the composite.

B)   not recalculating historical performance data based on trade-date accounting.

C)   not providing portfolio values on the dates of large cash flows.

Q17. Walsh forgot to point out the GIPS violation involving:

A)   failure to disclose treatment of withholding tax on capital gains.

B)   frequency of portfolio asset-weighting.

C)   lack of disclosure about fiscal year end.