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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 m: Explain the conditions under which the performance record of a past firm or affiliation must be linked to or used to represent the historical record of a new firm or affiliation.

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Three portfolio managers left their previous employer two years ago to form Atomic Investment Management. The reason for their departure was a desire to be solely responsible for investment decisions as opposed to the consensus approach that was utilized at their old firm. Atomic wants to claim compliance with the Global Investment Performance Standards (GIPS), but does not have a 5-year minimum compliance history. Under the GIPS standards, which of the following actions may Atomic take in order to claim compliance? Atomic may:

A) link three years of the managers' performance history from the previous employer to the 2-year history since Atomic's inception with a clear and unambiguous disclosure.

B) present a 2-year GIPS-compliant performance history.

C) not present its performance in compliance with the GIPS until it has established a 5-year performance history.

D) link the managers' prior-performance history to its 2-year performance history only if the prior performance was presented in compliance with the GIPS.

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Answer and Explanation

Atomic does not meet the test of performance portability under GIPS standard 5.A.4. Thus, performance results from the previous employer cannot be linked to or used to represent Atomics historical record. In any case, Atomic is not required to present a 5-year GIPS-compliant performance record. Since Atomic is less than five years old, it can claim compliance with GIPS by presenting a GIPS-compliant performance history for the two years since its inception.

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Mesa Asset Management claims compliance with the Global Investment Performance Standards (GIPS®). Robert Flay, managing director for Mesa wants to go beyond merely complying with the standards and wants to incorporate all of the GIPS recommendations, particularly those dealing with presentation and reporting. Flay asks two of his performance analysts, Catherine Cora and Luigi Batali for suggestions as to how Mesa can incorporate the recommendations.

Cora:	Mesa is permitted to link our noncompliant annual performance data from 1996-1999 to our GIPS compliant data, as long as we meet the disclosure requirements. GIPS reporting recommendations suggest that we eliminate all non-compliant data after presenting the required 5 years of compliant historical performance.
Batali:	Including a measure of the standard deviation of composite returns is extra information that will provide prospective clients with information regarding the fluctuation of composite returns over time.

After listening to their statements, Flay should:

A) agree with Cora, but disagree with Batali.

B) agree with both Cora and Batali.

C) disagree with both Cora and Batali.

D) disagree with Cora, but agree with Batali.

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Answer and Explanation

Flay should disagree with Cora. The recommendations do not suggest eliminating non-compliant data. The recommendations suggest bringing non-compliant data that is linked with compliant data into compliance early in order to present a compliant 10-year performance history. Flay should agree with Batali. The recommendations suggest presenting relevant composite-level risk measures, such as standard deviation for the composite as a whole. Note that this standard deviation measure would be different from the internal dispersion measure that measures the standard deviation within the composite (relative to the average composite return).

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Assume that on October 20, 2005, Firm X, which is in compliance with the Global Investment Performance Standards (GIPS), acquired the assets for Firm Z, which is not in compliance with the GIPS standards. Until what date may Firm X continue to claim compliance with the Standards before it must have the assets of Firm Z GIPS compliant?

A) January 1, 2006.

B) October 20, 2006.

C) January 1, 2008.

D) January 1, 2007.

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Answer and Explanation

Under GIPS standard 5.A.4, if a compliant firm acquires or is acquired by a non-compliant firm, the firms have one year to bring the non-compliant firms acquired assets into compliance.