Reading 49: Global Investment ....mance Standards－LOS h Investment, investment

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 18: Global Investment Performance Standards
Reading 49: Global Investment Performance Standards
LOS h: Explain the role of investment mandates, objectives, or strategies in the construction of 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 FALSE?

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

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

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

D) Terminated portfolios must be included in the historical record of the appropriate composites up to the last full measurement period that the portfolio was under management.

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Answer and Explanation

Portfolios must not be switched from one composite to another unless documented changes in client guidelines or the redefinition of the composite make switching appropriate. The historical record of the portfolio must remain with the appropriate composite.

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Which of the following statements best describes possible investment strategies of a firms composites?

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

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

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

D) Strategies should be as broad as possible, so as to allow portfolios to be grouped into relatively large and meaningful composites.

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Answer and Explanation

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

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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) At the annual meeting, a client has specified different objectives for their discretionary portfolio.

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

C) 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.

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

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Answer and Explanation

All four 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.