LiquidAssets10

All of the following are requirements of the Global Investment Performance Standards (GIPS) EXCEPT:

A) returns from cash and cash equivalents held in portfolios must be included in total-return calculations.

B) a firm is required to present, at minimum, ten years of annual investment performance that is compliant with GIPS.

C) portfolios must be valued at least monthly for periods beginning January 1, 2001.

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GIPS require that firm’s present, at minimum, five years (not ten) of annual investment performance that is compliant with GIPS. After a firm presents 5 years of compliant history, it must annually add each subsequent year up to a total of 10 years. Note that GIPS also require monthly valuation after January 1, 2001.

LiquidAssets10

Firm X currently claims compliance with the Global Investment Performance Standards (GIPS) but uses settlement-date accounting. Beginning January 1, 2005, what must Firm X do to remain compliant?

A) Begin using trade-date accounting and recalculate historical performance of its composites.

B) Nothing, there is no change in requirements.

C) Begin using trade-date accounting.

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Standard 1.A.45 requires that firms use trade-date accounting for periods beginning January 1, 2005. These firms, however, will not be required to recalculate performance results that were presented in accordance with the Standards for periods prior to January 1, 2005.

LiquidAssets10

Which of the following is an important requirement of Global Investment Performance Standards (GIPS)?

A) Dividends from equities must be accrued as of the ex-dividend date.

B) Firms need to comply with the local laws of regulation, which supersede GIPS.

C) Time-weighted rates of return that adjust for daily-weighted cash flows must be used beginning January 1, 2003.

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Time-weighted rates of return that adjust for daily-weighted cash flows must be used beginning January 1, 2005. Dividends from equities should be accrued as of the ex-dividend date is a recommendation and not a requirement.

LiquidAssets10

LNJ Asset Management, Inc., would like to claim compliance with the Global Investment Performance Standards (GIPS). Which of the following statements would render LNJ ineligible for this claim?

A) LNJ has only been in existence for four years.

B) Portfolio valuations are on a cost basis.

C) Prior to 2010, LNJ portfolios were not revalued on the date of large cash flows.

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Portfolios are to be valued on a market value basis. Both remaining statements are consistent with GIPS.

LiquidAssets10

Which of the following actions are recommended (not required) for claiming compliance with the Global Investment Performance Standards?

A) Total return, including realized and unrealized gains plus income must be used.

B) Accrual accounting should be used for dividends (as of the ex-dividend date).

C) If a firm sets a minimum asset level for portfolios to be included in a composite, no portfolios below that level can be included in the composite.

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This is a recommended action step while the remainder are required.

LiquidAssets10

The Strausburg Investment Management (SIM) manages portfolios that are represented in more than 15 composites. Over the years, the exact number of portfolios under management has fluctuated between 65 and 95 due to terminations and additions. Assume that SIM is notified of the termination of a portfolio on 25 August, 2012. At the end of which of the following dates should the terminated portfolio be removed from its composite order to be compliant with the Global Investment Performance Standards (GIPS)?

A) 30 August, 2012.

B) 31 December, 2011.

C) 31 July, 2012.

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GIPS Standard 3.A.6 requires terminated portfolios to be included in the historical record of the appropriate composite(s) through the last full measurement period that the portfolio was under management. Standard 1.A.3 requires that portfolios must be valued at least monthly. Thus, SIM should remove the portfolio from its composite at the end of the month preceding its termination (i.e., 31 July, 2012).

LiquidAssets10

Under the Global Investment Performance Standards (GIPS), for periods beginning January 1, 2001, portfolio valuation must be based on:

A) market values and they must occur at least quarterly.

B) cost basis and they must occur at least monthly.

C) market values and must occur at least monthly.

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GIPS require portfolio valuation to be based on market values and valuation must occur at least monthly for periods beginning January 1, 2001. For periods beginning January 1, 2010, firms must value portfolios on the date of all large external cash flows, as of the calendar month end or the last business day of the month.

LiquidAssets10

Which of the following is NOT a Global Investment Performance Standards (GIPS) input data requirement?

A) For periods beginning January 1, 2010, portfolios must be valued on the date of all large cash flows.

B) For periods beginning January 1, 2005, firms must use settlement date accounting.

C) Portfolio valuations must be based on fair value (not cost basis or book values).

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Standard 1.A.5 states that for periods beginning January 1, 2005, firms must use trade date accounting. Standard 1.A.3 states that for periods beginning January 1, 2010, firms must value portfolios on the date of all large cash flows.

LiquidAssets10

Eric Jicu, a highly successful portfolio manager of the EJ Fund, wishes to define the EJ Fund as a firm under the Global Investment Performance Standards (GIPS®) standards. Jicu is employed by National Investing Alliance (NIA), a small regional brokerage firm. Although he has disclosed this information to his superiors at NIA, he would like to disclose his compliance for marketing purposes by using his past actual performance results of five years, which included two years of simulated results. Jicu also managed several non-fee-paying portfolios that were non-discretionary under a different investment style. Since the results of these non-discretionary portfolios were highly successful, he wanted to include them into his EJ Fund composites for compliance. In his statement of compliance, Jicu wrote: "The EJ Fund claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. The EJ Fund has not been independently verified."In defining a firm, does the EJ Fund qualify as a firm under GIPS?

A) Yes, since the EJ Fund is a separate entity it does qualify under GIPS.

B) No, since to claim compliance NIA must be included.

C) No, since there is no mention that Jicu is incorporated he cannot qualify as a firm.

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No, the EJ Fund does not qualify as a firm for GIPS compliance. In order to claim compliance, NIA must be included. In order for an investment firm to claim GIPS compliance, the GIPS must be applied on a firmwide basis. The key here is the definition of the firm, because it establishes the boundaries for what constitutes firm assets, and the set of portfolios that must be included in at least one composite. According to the GIPS, firms must be defined as:

"An investment firm, subsidiary, or division held out to clients or prospective clients as a distinct business entity."

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In constructing the historical results of the EJ Fund, is Jicu correct in his approach?

A) Yes, because he included five years of actual performance data.

B) No, because GIPS requires a minimum of ten years of performance before claiming compliance.

C) No, because simulated results cannot be included with actual performance results.

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Jicu is not correct because simulated results must not be included with actual performance results. Under GIPS, composites must include only assets under management and may not link simulated or model portfolios with actual performance. Simulated, back-tested, or model portfolios results do not represent the returns of actual assets under management and may not be included in composite performance results.

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In constructing the composites, is Jicu correct in his approach?

A) No, since fee-paying and non-fee-paying portfolios cannot be included in the same portfolio.

B) No, since the fee-paying discretionary portfolios are managed under a different investment style as the non-fee-paying non-discretionary portfolios.

C) Yes, since fee-paying and non-fee-paying portfolios can be included in the same composite as long as they have the same investment objectives.

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Jicu is not correct in the construction of composites. They may not include any non-fee paying and non-discretionary portfolios in his composite because they have a different investment objective and style than the EJ Fund.  Non-fee-paying portfolios may be included in the firm’s composites, but if they are, firms are required to disclose the percentage of composite assets represented by non-fee-paying portfolios.  If the firm includes non-fee-paying portfolios in its composites, they are subject to the same rules as fee-paying portfolios.  If a portfolio’s status changes from discretionary to non-discretionary, the portfolio may not be removed from a composite retroactively. However, the portfolio may be removed on a prospective basis. Composites must include all actual fee-paying discretionary portfolios.  All actual fee-paying discretionary portfolios must be included in at least one composite.  By including all fee-paying discretionary portfolios in at least one composite, firms cannot cherry-pick their best performing portfolios to present to prospective clients.  Firms are permitted to include a portfolio in more than one composite, provided it satisfies the definition of each composite.
Firm composites must be defined according to similar investment objectives and/or strategies.  Composites should be defined such that clients are able to compare the performance of one firm to another.  Composites must be representative of the firm’s products and be consistent with the firm’s marketing strategy.  Firms are not permitted to include portfolios with different investment strategies or objectives in the same composite.  Portfolios may not be moved into and out of composites except in the case of valid, documented, client-driven changes in investment objectives or guidelines or in the case of the redefinition of the composite.

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In the compliance statement, is Jicu correct is claiming compliance?

A) No, since Jicu is not in full compliance with GIPS.

B) No, since Jicu’s GIPS compliance statement is not written correctly.

C) Yes, since Jicu is in compliance with GIPS.

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No, Jicu may not claim compliance for the EJ Fund for all of the above reasons. A firm must be in full compliance with the GIPS in order to claim GIPS compliance. There is no such thing as partial GIPS compliance!
If the performance presentation does not meet all of the requirements of the GIPS, firms cannot claim compliance with any exceptions.

LiquidAssets10

If DeLecrette Investment Management wishes to claim compliance with the Global Investment Performance Standards (GIPS®) for their annual financial report, the report must include which of the following statements?

A) DeLecrette Investment Management has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®).

B) DeLecrette Investment Management has prepared and presented this report in compliance with the Global Investment Performance Standards of the CFA Institute (CFA Institute-GIPS®). The CFA Institute Global Investment Performance Standards Committee has not been involved with the preparation or review of this report.

C) DeLecrette Investment Management claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. DeLecrette Investment Management has not been independently verified.

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To claim compliance, a firm must meet all required composite, calculation, disclosure, and presentation Standards. The firm is also encouraged to comply with all recommended Standards and must comply with local laws and regulations. Firms that claim compliance to the GIPS may attach the following statement to performance presentations:
"[Insert name of firm] claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. [Insert name of firm] has not been indpendently verified."
Note that no statement about CFA Institute’s involvement with the preparation or review of the report is included.