LiquidAssets10

The investment management firm of Rakes, Finch, and Weeks (RFW) manages several fee-paying portfolios to a long-short strategy. RFW does not ever intend to market this strategy, so they do not include the performance of these portfolios in any of the firm’s composites. Which of the following statements indicates what RFW must do if it intends to claim compliance with the Global Investment Performance Standards (GIPS)? RFW must:

A) disclose the fact that the long-short portfolios are not included in any of the firm's composites.

B) include the long-short portfolios in a composite of portfolios managed to a strategy that the firm does not intend to market.

C) include the long-short portfolios in at least one of the firm's composites.

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GIPS Standard 3.A.1 requires that all actual fee-paying discretionary portfolios are included in at least one composite. It is irrelevant whether or not the firm ever plans to market a particular strategy to which a portfolio is being managed. If the portfolio is fee-paying and discretionary, it must be included in a composite.

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Which of the following statements is the best description of whether a portfolio should be included in a composite?

A) All actual, fee-paying portfolios should be included in a composite.

B) All discretionary portfolios must be included in a composite.

C) Non-fee-paying portfolios may be included in a composite if they are discretionary.

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All actual, fee-paying, discretionary portfolios must be included in at least one composite. Non-fee-paying discretionary portfolios may be included in a composite, but non-discretionary portfolios may not be included.

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Which of the following portfolios is least likely to be included in a composite described as “U.S. Equity composite”? A portfolio:

A) of U.S. equities that must hold at least 20% in cash.

B) consisting mostly of U.S. equities that is already included in the same manager’s “Global Equity composite”.

C) of U.S. equities that may not diverge from the S&P 500 index performance by more than 100 basis points per year.

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A very limited tracking error is likely to remove the discretion from a portfolio, preventing it from being included in a composite. A portfolio may be in two composites provided it falls under both composite descriptions.

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A portfolio changes from being discretionary to being non-discretionary. What action should the manager take with respect to composite construction and calculation?

A) The manager may leave the portfolio in the calculation of historic performance but may remove the portfolio from future calculations.

B) The manager must remove the portfolio from the composite, including the historic performance.

C) The manager must leave the portfolio in the calculation of historic performance but must remove the portfolio from future calculations.

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Historic performance cannot be adjusted by removing the portfolio. However, once a portfolio becomes non-discretionary, it may no longer be included prospectively.

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Jessica French is an individual investment advisor with 200 clients and claims she conforms to Global Investment Performance Standards (GIPS). French includes all of the clients on her books. One of those clients is her father, to whom she charges no fee. However, she manages that portfolio using the same processes as she uses for her paying clients. Another client included in the composite is John Randolph, a wealthy entrepreneur. Randolph is the only client who does not give her discretion over the assets and makes every decision himself, getting suggestions from French and using her to implement decisions. French:

A) conforms to GIPS, if disclosures are made about the non-fee-paying account.

B) has violated GIPS because it includes her father's account, but not because it includes Randolph's account.

C) has violated GIPS because it includes Randolph's account, but not because it includes her father's account.

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Non-fee-paying clients can be included in the same composite as fee-paying clients as long as it is disclosed. Nondiscretionary clients should not be included in the composite as the clients would not adhere to the investment strategy used by the investment advisor.

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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?

A) No, because the firm does not normally manage portfolios to a growth equity strategy and is not planning to promote it.

B) Yes, because the portfolios are managed to a widely recognized investment strategy.

C) Yes, because the portfolios are discretionary and fee paying.

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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.

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A composite is an aggregation of discretionary portfolios into a single group that represents a particular investment objective or strategy. Composites are the primary vehicle for presenting performance to a prospective client. Which of the following statements concerning composites is least accurate?

A) Portfolios may not be switched from one composite to another.

B) All actual fee-paying discretionary portfolios must be included in at least one composite.

C) Firm composites must be defined according to similar investment objectives and/or strategies.

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Portfolios may be switched from one composite to another if documented changes to a portfolio's investment mandate, objective, strategy, or redefinition of the composite make switching appropriate.

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Which of the following statements best describes possible investment strategies of a firm’s composites?

A) Strategies should be as fully defined as possible so that portfolios within the composites closely match each other.

B) Strategies should avoid having too many qualifiers to prevent the manager from having a large number of small composites.

C) The strategies should not overlap, so as to prevent portfolios falling under multiple composite descriptions.

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Strategies may overlap, and portfolios may fall under two descriptions. Strategies should have a suitable number of qualifiers (such as sector, style, benchmark or capitalization) – having too many qualifiers results in a large number of composites each containing too few portfolios; having too few qualifiers results in composites that are too broad.

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Which of the following descriptions are appropriate qualifiers for a composite?

"Small Cap"

"High Duration"

"Above €10 million"

A) Appropriate Appropriate Not appropriate

B) Appropriate Not appropriate Appropriate

C) Appropriate Appropriate Appropriate

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All three qualifiers are appropriate for a composite. Note that each composite should have sufficient qualifiers to make it meaningful, but not too many so as to avoid fragmentation of portfolios.

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Which of the following reasons is least likely to explain why a portfolio has been moved from one composite to another?

A) The firm has redefined the composite, and the portfolio no longer falls under the new definition.

B) The portfolio size has grown above £5 million and is more suitable to the “UK Equities above £5 million” composite than the “UK Equities below £5 million” composite.

C) The portfolio size has recently fallen below the minimum threshold specified for the “Japanese Value Equities above ¥500 million” composite.

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All of the suggestions could be valid reasons for moving a portfolio into or out from a composite. However, if a portfolio falls below a specified minimum and the drop is not likely to be permanent, then the portfolio may remain in that composite in the short-term.