Portfolio Management and Wealth Planning【 Reading 43】 increase, 2012, following, Investment

Bad5shah

Which of the following lines of argument has/have been put forth to justify the establishment of the Global Investment Performance Standards (GIPS)?

A) To enhance consistency in the use of the standards.

B) All of these choices are correct.

C) To increase the confidence that prospective and existing clients have in the industry.

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The GIPS are needed are to enhance consistency in performance presentation for inter-country holdings, consistency in the use of standards, competition in global markets, and investor confidence.

JustasS

Jonathan Goolsby, a performance-reporting analyst at Handley Asset Management (HAM), is preparing after-tax returns for inclusion in a performance presentation and needs to determine the most appropriate method to incorporate the effects of taxes on returns. HAM employs tax-aware portfolio management strategies. If Goolsby uses the mark-to-liquidation method when computing after-tax returns, the most likely effect is that returns will be:

A) overstated.

B) correctly stated.

C) understated.

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The mark-to-liquidation method assumes all gains, whether recognized or not, are taxed each period. Under this method, taxes will be overstated and returns will be understated for a portfolio that uses tax-aware strategies. For example, HAM may delay selling a stock that has had capital gains to delay taxes to a future period, thus increasing the returns of the portfolio. Under the mark-to-liquidation method, the returns would be calculated as if the stock had been sold and the gains realized in that period. Thus increasing taxes for that period and decreasing returns.

JustasS

When adjusting after-tax returns to account for the effects of non-discretionary trades resulting from client directed withdrawals, the adjustment amount should reflect the tax effect that would result from selling:

A) a proportionate amount of each security.

B) the most highly appreciated securities.

C) the securities with the least amount of appreciation.

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Managers have an incentive to use the adjustment amount that reflects the tax effect from selling the most highly appreciated securities as this would result in the highest adjusted returns, but since this may allow for manipulation of reporting, it is recommended that the adjustment value reflect the sale of a proportionate amount of each security.

JustasS

GIPS guidance for reporting after-tax returns for periods beginning on or after January 1, 2011 is most likely contained in the:

A) country-specific guidance released by the country sponsors.

B) GIPS standards in the provision regarding calculation methodology.

C) GIPS standards in the section regarding GIPS valuation principles.

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Since after-tax issues are highly dependent on the taxing authority for the country in which the funds are being managed, the specific guidance on the presentation of after-tax returns was removed from the GIPS standards. The responsibility now falls to the country sponsors and the guidance is to be addressed in the country-specific guidance.

JustasS

A portfolio manager whose firm follows GIPS is concerned about the effect on his reported investment performance of a large client-directed withdrawal and the resulting liquidation of certain securities. What would be the best method for adjusting results for client-directed withdrawals in discretionary portfolios, in accordance with GIPS?

A) In this situation, the portfolio should be labeled non-discretionary, and all current and historical returns should be removed from the composite results.

B) GIPS recommend that the manager assumes a proportionate amount of each security is sold, in determining a fair tax adjustment to "add back."

C) The manager is not permitted to add back the non-discretionary taxes in order to improve the reported composite returns.

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This proportional adjustment method should be used in order to properly comply with GIPS. This method is preferred, in order to avoid the temptation to assume the security with the greatest embedded capital gain was sold, in order to improve the adjustment, and resulting reported returns.

JustasS

The purpose of third-party verification:

A) is required by CFA Institute but not the SEC.

B) is required by CFA Institute and the Securities and Exchange Commission (SEC).

C) may give a GIPS compliant firm a competitive advantage by making the claim to GIPS compliance more credible.

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As of now, the only purpose of verification is to give the GIPS compliant firm a competitive edge. Prospective clients will have more confidence in the claim of GIPS compliance.

JustasS

As part of the verification process of a firm claiming GIPS compliance, the third party doing the verification asks for a list and description of the firm’s composites and a list of all portfolios under the firm’s management. Which of these requests is (are) actually part of the preparation process?

A) A list of all portfolios under management but not a list and description of composites.

B) A list and description of composites but not a list of all portfolios under management.

C) Both asking for a list and description of composites and a list of all portfolios under management.

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The verification includes both of these requests as well as many others such as a sample of performance presentations and marketing materials and all investment management agreements or contracts.

JustasS

A firm that is claiming GIPS compliance is considering verification. Verification:

A) could be on select composites after the whole firm has been verified.

B) could be on select composites as part of the firm wide verification.

C) would include all composites as part of the firm wide verification.

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As part of the verification process the firm must comply with all the composite construction requirements of GIPS on a firm-wide basis. This means that a single verification report is issued to the entire firm and that GIPS verification cannot be carried out for a single composite.

JustasS

Black and Black Associates (BBA) is a money management firm that is advertising that it is GIPS compliant. BBA actively employs derivatives and leverage, and these tools have a material affect on composite returns. With respect to describing their use of these tools in their advertisements, BBA:

A) need not mention neither leverage nor derivatives.

B) must do so with respect to derivatives but not leverage.

C) must do so with respect to both derivatives and leverage.

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Guideline B.11 stipulates that the use of derivatives, leverage, and short positions must be described under these conditions.

JustasS

White and White Associates (WWA) is a money management firm that is planning to advertise that it is GIPS compliant. In the advertisement, WWA may include performance results:

A) and does not have to include any additional information concerning performance.

B) only if WWA includes further information including the return of the composite's benchmark.

C) only if there has been third-party verification.

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Guideline B.7 stipulates that any advertisement that includes performance results must also include additional information such as the return of the composite's benchmark.