Reading 49: Global Investment ....mance Standards－LOS b Investment, standards

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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 b: Formulate the objectives, key characteristics, and scope of the GIPS standards.

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Which of the following is NOT an objective of the Global Investment Performance Standards (GIPS)?

A) To obtain worldwide recognition by securities regulators of a standard for the calculation and presentation of investment performance in a fair, comparable format that provides full disclosure.

B) To ensure accurate and consistent investment performance data for reporting, record keeping, marketing, and presentation.

C) To promote fair, global competition among investment firms for all markets without creating barriers to entry for new firms.

D) To foster the notion of industry self-regulation on a global basis.

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Answer and Explanation

GIPS applies to investment management firms and is intended to serve the existing and prospective clients of investment management firms, not regulators.

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Which of the following is NOT a key characteristic of the Global Investment Performance Standards (GIPS)? GIPS:

A) represent the highest performance measurement and presentation practice worldwide.

B) are ethical standards for investment performance presentation to ensure fair representation and full disclosure of an investment firm's performance history.

C) require managers to include all actual fee-paying and non-fee-paying discretionary portfolios in composites defined according to similar strategy and/or investment objective.

D) require firms to use certain calculation and presentation methods and to make certain disclosures along with the performance record.

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Answer and Explanation

The GIPS do not require managers to include non-fee-paying accounts in composites.

tycoon

Which of the following statements is a key characteristic of Global Investment Performance Standards (GIPS)?

A) GIPS require managers to include all actual fee-paying and non-fee-paying discretionary portfolios in composites defined according to similar strategy and/or investment objective.

B) GIPS require firms to show GIPS-compliant history for a minimum of ten years, or since inception of the firm or composite if in existence less than ten years.

C) In cases in which applicable local or country-specific law or regulation conflicts with GIPS, the standards require firms to comply with GIPS in order to claim compliance.

D) GIPS exist as a minimum worldwide standard where local or country-specific law, regulation, or industry standards may not exist for investment performance measurement and/or presentation.

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Answer and Explanation

The GIPS standards: (1) do not require managers to include non-fee-paying accounts in composites, (2) require five years of GIPS compliant history, and (3) require compliance with local laws when they conflict with GIPS and disclosure of the conflict.

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Which of the following is an incorrect representation of requirements needed to meet the Global Investment Performance Standards (GIPS)?

A) Benchmarks and composites should be created on an ex ante basis.

B) Dollar-weighted rates of return should be used for the return calculations.

C) A firm is required to present at least five years of annual investment performance that is in compliance with GIPS. If the firm has been in existence for less time, then the performance must be presented since inception.

D) GIPS must be applied on a firm-wide basis.

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Answer and Explanation

Time-weighted rates of return should be used for the return calculations.

tycoon

Each of the following is one of the objectives of the Global Investment Performance Standards (GIPS) EXCEPT to:

A) foster the notion of industry self-regulation on a global basis.

B) ensure accurate and consistent investment performance data for reporting, record keeping, marketing, and presentation.

C) promote fair, global competition among investment firms for all markets without creating barriers to entry for new firms.

D) obtain worldwide awareness of country-specific standards for the calculation and presentation of investment performance.

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Answer and Explanation

GIPS Objectives:

• To obtain worldwide acceptance of a global standard (not country-specific) for the calculation and presentation of investment performance in a fair, comparable format that provides full disclosure.

• To ensure accurate and consistent investment performance data for reporting, record keeping, marketing, and presentation.

• To promote fair, global competition among investment firms for all markets without creating barriers to entry for new firms.

• To foster the notion of industry self-regulation on a global basis.

GIPS Objectives:

• To obtain worldwide acceptance of a global standard (not country-specific) for the calculation and presentation of investment performance in a fair, comparable format that provides full disclosure.

• To ensure accurate and consistent investment performance data for reporting, record keeping, marketing, and presentation.

• To promote fair, global competition among investment firms for all markets without creating barriers to entry for new firms.

• To foster the notion of industry self-regulation on a global basis.

tycoon

Each of the following is an objective of the Global Investment Performance Standards (GIPS) EXCEPT to:

A) foster the notion of industry self-regulation on a global basis.

B) promote fair, global competition among investment firms for all markets without creating barriers to entry for new firms.

C) obtain worldwide acceptance of a standard for the calculation and presentation of investment performance in a fair, comparable format that provides full disclosure.

D) broaden the application and acceptance of the performance presentation guidelines of foreign and domestic regulatory entities.

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Answer and Explanation

GIPS Objectives:

• To obtain worldwide acceptance of a global standard (not country-specific) for the calculation and presentation of investment performance in a fair, comparable format that provides full disclosure.

• To ensure accurate and consistent investment performance data for reporting, record keeping, marketing, and presentation.

• To promote fair, global competition among investment firms for all markets without creating barriers to entry for new firms.

• To foster the notion of industry self-regulation on a global basis.

GIPS Objectives:

• To obtain worldwide acceptance of a global standard (not country-specific) for the calculation and presentation of investment performance in a fair, comparable format that provides full disclosure.

• To ensure accurate and consistent investment performance data for reporting, record keeping, marketing, and presentation.

• To promote fair, global competition among investment firms for all markets without creating barriers to entry for new firms.

• To foster the notion of industry self-regulation on a global basis.

tycoon

Each of the following is an objective of the Global Investment Performance Standards (GIPS) EXCEPT to:

A) foster the notion of industry self-regulation on a global basis.

B) ensure accurate and consistent investment performance data for reporting, record keeping, marketing, and presentation.

C) obtain worldwide acceptance of a standard for the calculation and presentation of investment performance in a fair, comparable format that provides full disclosure.

D) promote fair, global competition among investment firms that adopt GIPS and to create barriers to entry for new firms that do not.

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Answer and Explanation

GIPS Objectives:

• To obtain worldwide acceptance of a global standard (not country-specific) for the calculation and presentation of investment performance in a fair, comparable format that provides full disclosure.

• To ensure accurate and consistent investment performance data for reporting, record keeping, marketing, and presentation.

• To promote fair, global competition among investment firms for all markets without creating barriers to entry for new firms.

• To foster the notion of industry self-regulation on a global basis.

GIPS Objectives:

• To obtain worldwide acceptance of a global standard (not country-specific) for the calculation and presentation of investment performance in a fair, comparable format that provides full disclosure.

• To ensure accurate and consistent investment performance data for reporting, record keeping, marketing, and presentation.

• To promote fair, global competition among investment firms for all markets without creating barriers to entry for new firms.

• To foster the notion of industry self-regulation on a global basis.

tycoon

Stuart Lessing, CFA, is the Minister of Finance for the small country of Panila. Part of Lessings responsibilities includes supervising and regulating the investment management industry for Panila. He is interested in adopting Global Investment Performance Standards (GIPS) to simplify the process of comparing investment results from different money management firms within the country. In addition, he believes that adoption would give Panila an advantage against similarly situated countries. Panila currently has no standards. After pondering the question, he decides to adopt GIPS. Was he justified in his actions?

A) No, because a majority of investment firms did not OK the adoption.

B) No, because one of the objectives of GIPS is to promote fair global competition without creating barriers to entry.

C) Yes, if Panila can benefit globally, then they should adopt the GIPS.

D) Yes, provided that Lessing provides the Panila version to CFA Institute.

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Answer and Explanation

One of the objectives of GIPS is to promote global competition without creating barriers to entry. Adopting GIPS to keep out competition via other countries violates this objective. Countries, and not firms, decide upon GIPS standards. Also, GIPS are voluntary standards. Required adoption of the standards by a cuntry would go against the vision of the GIPS standards which are intended to foster industry self-regulation. Versions of GIPS must be translated into the native language to foster adoption locally.

tycoon

Which of the following statements about the Global Investment Performance Standards (GIPS) is TRUE?

A) Non-English speaking countries are allowed to translate GIPS.

B) GIPS can be used by good investment management firms to create barriers to entry.

C) GIPS may only be used for reporting and not for presentation.

D) GIPS allows firms to select which portfolios to include.

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Answer and Explanation

Countries are allowed to translate GIPS to improve local acceptance of the standards. If management firms use GIPS to create barriers to entry, then the firm has violated one of the objectives of the standard (to promote global competition). GIPS is to be used for reporting, record keeping, and marketing as well as presentations. Firms are not allowed to present only the results of select (best performing) portfolios.