LOS j: State the requirements and recommendations of the GIPS standards for asset class segments carved out of multi-class portfolios.

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.

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

A)   Action 1.

B)   Action 7.

C)   Action 4.

Q2. Graham and Crickenburg Associates is a large money-management company. The firm has been in existence for four years, and Graham and Crickenburg Associates has two divisions. One division in the company handles all the individual client accounts and one division handles all the corporate accounts. The co-owners and chief executive officers, Charles Graham and Kevin Crickenburg, are considering the advantages of conforming to the Global Investment Standards, GIPS?. Graham thinks that it may be more cost effective to only make the individual client division GIPS compliant. Graham thinks this it is possible to make one part of the firm GIPS compliant if they sign a letter of intent that they will make the entire company GIPS compliant within a year. Crickenburg says that it is not possible, because the entire company must become GIPS compliant or not at all. They resolve to investigate the issue later, and Graham and Crickenburg move on to examining the requirements for input data and calculations.

Graham and Crickenburg note that they have records concerning the returns of portfolios in both divisions going back since the firm began. The returns were calculated monthly, used accrual accounting for fixed-income assets, used accrual accounting for dividend-paying stocks, and used settlement-date prices. They have all the final returns for the portfolios in hard copy form. Most of the raw data pertaining to the returns of the assets in the portfolios and calculation methods have been lost. This was because Graham and Crickenburg threw away the hard copy of the raw data. A computer virus destroyed many of the raw data files. Graham and Crickenburg discuss the adequacy of the data for GIPS compliance. Graham says that only having the returns data is sufficient since the company had an external CPA go over the books each year. Crickenberg says that having records going back four years is sufficient.

Graham and Crickenburg Associates has a wide variety of individual clients. Some of the clients are very conservative, and some are very aggressive. Two separate clients are so conservative that, four years ago, they stipulated that their entire portfolio simply be invested equally across US Treasury strips with two, four, six and eight years to maturity. As each group matures, as the first set did two years ago, it would be rolled over into the eight years to maturity strips again. These clients put their money with Graham and Crickenburg Associates so that the company would take care of the rollover, the paperwork, and computing the tax liability. The clients pay a fee for this service.

The portfolios of the more aggressive clients were managed by Jill Laporte, CFA, for the first two years of the existence of Graham and Crickenburg Associates. The portfolios she managed had higher returns and lower standard deviations than their respective indexes for those first two years. After two years, Laporte left the firm and took a small number of the clients with her. After she left, the aggressive portfolios that had been under her management and remained with Graham and Crickenburg Associates underperformed their respective indexes.

Graham and Crickenburg Associates is an American based firm with most of its clients living or doing business in the United States. Some of the clients are foreign, however, and have the majority of their holdings in foreign assets. Graham and Crickenburg have been computing the returns of these portfolios in their respective domestic currencies. The portfolios denominated in foreign assets use foreign benchmarks, naturally, and some of the indexes used as benchmarks report returns net of taxes. Graham and Crickenburg discuss the extent of the details they must report with respect to these facts. Graham says that they must disclose the currency used to express the performance of each portfolio. Crickenburg says they do not have to disclose details concerning indexes reporting returns net of taxes.

In Graham’s and Crickenburg’s discussion concerning whether to make only a portion of the company GIPS compliant, they each gave an opinion concerning the possibility of making only one division GIPS compliant and a reason supporting that opinion. With respect to both the opinion and reason:

A)   only one is correct.

B)   both are correct.

C)   both are incorrect.

Q3. With respect to the historical input data, which of the following are impediments to Graham and Crickenburg associates becoming GIPS compliant? The returns:

A)   are calculated using settlement-day prices.

B)   are calculated monthly.

C)   of the dividend-paying stocks are calculated using accrual accounting.

Q4. With respect to the historical input data and the existence of only the portfolio returns data and that the data only goes back four years, Graham and Crickenberg both state the data is sufficient. Graham says only having the portfolio returns is sufficient, and Crickenberg says only having four years is sufficient. With respect to these statements:

A)   only Graham is incorrect.

B)   only Crickenberg is incorrect.

C)   both are incorrect.

Q5. As described, Graham and Crickenburg Associates has two clients that have all their money in US Treasury strips. With respect to including these portfolios in a composite they:

A)   must be included in a composite of fixed income portfolios.

B)   cannot be included because they are nondiscretionary.

C)   cannot be included because fees are paid.

Q6. With respect to Jill Laporte leaving the company two years ago, to be GIPS compliant, Graham and Crickenburg Associates:

A)   must disclose this because she took some of the clients with her.

B)   need not disclose this under any circumstances.

C)   must disclose this as a significant event given her record.

Q7. Some portfolios hold foreign assets and use benchmarks that are net of taxes. In order to be GIPS compliant, Graham said that they must disclose details concerning the currency, but Crickenburg says they do not have disclose that some of the index returns are computed net of taxes. With respect to these statements:

A)   both are incorrect.

B)   only one is correct.

C)   both are correct.