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Teaton Investment Management (TIM) has recently developed a proprietary prediction model. To test the model, TIM created a returns history for an equity value portfolio using hypothetical assets and a back-tested asset allocation strategy. TIM intends to include the simulated portfolio results in its performance presentation. Which of the following most accurately describes TIM’s compliance with the Global Investment Performance Standards (GIPS)? (Assume that TIM is GIPS-compliant in all other areas). TIM is:

A) GIPS-compliant as long as it discloses the inclusion of simulated returns in its performance presentation.

B) GIPS-compliant if it includes the simulated portfolio in a composite that consists solely of simulated portfolios.

C) not GIPS-compliant because the standards do not permit the inclusion of simulated portfolio results in performance presentations.

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A firm may not include model performance results in its presentation and claim compliance with GIPS. Under GIPS Standard 3.A.2, composites must include only assets under management and under Standard 3.A.3 firms may not link simulated or model portfolios with actual performance. Simulated, back-tested, or model portfolio results do not represent the returns of actual assets under management and, thus, may not be included in composites performance results.

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Which of the following is NOT a composite construction requirement under the Global Investment Performance Standards (GIPS)?

A) Firms must disclose the use of simulated or model portfolio results.

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

C) Carve-out returns excluding cash cannot be used to create a stand-alone composite.

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Under GIPS standard 3.A.2, composites must include only assets under management and under Standard 3.A.3 firms may not link simulated or model portfolios with actual performance. Simulated, back-tested, or model portfolio results do not represent the returns of actual assets under management and, thus, may not be included in composites performance results.

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

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

B) Composites must include new portfolios on a timely and consistent basis after each portfolio comes under management.

C) Terminated portfolios must be removed from the historical record of the appropriate composites for all years for which they were included in the composites.

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Standard 3.A.46 states that terminated portfolios must be included in the historical record of the appropriate composites up to the last full measurement period that each portfolio was under management. The inclusion of terminated portfolios in historical performance prevents survivorship bias.

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Graham and Crickenburg Associates is a large money-management company. The firm has been in existence for four years, and Graham and Crickenburg Associates has two divisions which are separate legal entities. One division in the company handles all the individual client accounts and one division handles all the corporate accounts. The co-owners and chief executive officers, Charles Graham and Kevin Crickenburg, are considering the advantages of conforming to the Global Investment Standards, GIPS®. Graham thinks that it may be more cost effective to only make the individual client division GIPS compliant. Graham thinks this it is only acceptable to make one part of the firm GIPS compliant if they sign a letter of intent that they will make the entire company GIPS compliant within a year. Crickenburg says that it is not possible, because the entire company must become GIPS compliant or not at all. They resolve to investigate the issue later, and Graham and Crickenburg move on to examining the requirements for input data and calculations.
Graham and Crickenburg note that they have records concerning the returns of portfolios in both divisions going back since the firm began. The returns were calculated monthly, used accrual accounting for fixed-income assets, used accrual accounting for dividend-paying stocks, and used settlement-date prices. They have all the final returns for the portfolios in hard copy form. Most of the raw data pertaining to the returns of the assets in the portfolios and calculation methods have been lost. This was because Graham and Crickenburg threw away the hard copy of the raw data. A computer virus destroyed many of the raw data files. Graham and Crickenburg discuss the adequacy of the data for GIPS compliance. Graham says that only having the returns data is sufficient since the company had an external CPA go over the books each year. Crickenberg says that having records going back four years is sufficient.
Graham and Crickenburg Associates has a wide variety of individual clients. Some of the clients are very conservative, and some are very aggressive. Two separate clients are so conservative that, four years ago, they stipulated that their entire portfolio simply be invested equally across US Treasury strips with two, four, six and eight years to maturity. As each group matures, as the first set did two years ago, it would be rolled over into the eight years to maturity strips again. These clients put their money with Graham and Crickenburg Associates so that the company would take care of the rollover, the paperwork, and computing the tax liability. The clients pay a fee for this service.
The portfolios of the more aggressive clients were managed by Jill Laporte, CFA, for the first two years of the existence of Graham and Crickenburg Associates. The portfolios she managed had higher returns and lower standard deviations than their respective indexes for those first two years. After two years, Laporte left the firm and took a small number of the clients with her. After she left, the aggressive portfolios that had been under her management and remained with Graham and Crickenburg Associates underperformed their respective indexes.
Graham and Crickenburg Associates is an American based firm with most of its clients living or doing business in the United States. Some of the clients are foreign, however, and have the majority of their holdings in foreign assets. Graham and Crickenburg have been computing the returns of these portfolios in their respective domestic currencies. The portfolios denominated in foreign assets use foreign benchmarks, naturally, and some of the indexes used as benchmarks report returns net of taxes. Graham and Crickenburg discuss the extent of the details they must report with respect to these facts. Graham says that they must disclose the currency used to express the performance of each portfolio. Crickenburg says they do not have to disclose details concerning indexes reporting returns net of taxes. In Graham’s and Crickenburg’s discussion concerning whether to make only a portion of the company GIPS compliant, they each gave an opinion concerning the possibility of making only one division GIPS compliant and a reason supporting that opinion. With respect to both the opinion and reason:

A) only one is correct.

B) both are incorrect.

C) both are correct.

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Because the subdivisions are distinct business entities, the company can define each of its divisions as a separate firm for the sake of GIPS compliance. Thus, one division can be GIPS compliant while the other is not. There need not be an intent to make all divisions GIPS compliant in such an instance. (Study Session 18, LOS 43.c)

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With respect to the historical input data, which of the following are impediments to Graham and Crickenburg associates becoming GIPS compliant? The returns:

A) are calculated using settlement-day prices.

B) are calculated monthly and on the date of all large cash flows.

C) of the dividend-paying stocks are calculated using accrual accounting.

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As of January 2005, trade-date prices must be used (Standard 1.A.5). Monthly calculations and accrual accounting for fixed-income assets is required. Accrual accounting for dividend-paying stocks is recommended. (Study Session 18, LOS 43.d)

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With respect to the historical input data, the existence of only the portfolio returns data, and the fact that data only goes back four years: Graham and Crickenberg both state the data is sufficient. Graham says only having the portfolio returns is sufficient, and Crickenberg says only having four years is sufficient. With respect to these statements:

A) only Crickenberg is incorrect.

B) both are incorrect.

C) only Graham is incorrect.

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Graham was incorrect because the supporting data must be maintained (Standard 1.A.1). Crickenberg was correct in that the firm has only been existence for four years, so four years of data is adequate. (Study Session 18, LOS 43.d)

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As described, Graham and Crickenburg Associates has two clients that have all their money in US Treasury strips. With respect to including these portfolios in a composite they:

A) must be included in a composite of fixed income portfolios.

B) cannot be included because they are nondiscretionary.

C) cannot be included because fees are paid.

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These two portfolios are clearly nondiscretionary, and they cannot be included in a composite (Standard 3.A.1). (Study Session 18, LOS 43.j)

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With respect to Jill Laporte leaving the company two years ago, to be GIPS compliant, Graham and Crickenburg Associates:

A) must disclose this as a significant event given her record.

B) must disclose this because she took some of the clients with her.

C) need not disclose this under any circumstances.

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Laporte’s leaving must be reported because a star portfolio manager leaving the firm is a significant event (Standard 4.A.14). (Study Session 18, LOS 43.k)

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Some portfolios hold foreign assets and use benchmarks that are net of taxes. In order to be GIPS compliant, Graham said that they must disclose details concerning the currency, but Crickenburg says they do not have disclose that some of the index returns are computed net of taxes. With respect to these statements:

A) only one is correct.

B) both are incorrect.

C) both are correct.

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Firms must disclose the currency used to express performance (Standard 4.A.7). Firms must disclose relevant details of the treatment of withholding tax on dividends, interest income, and capital gains. If using indices that are net of taxes, the firm must disclose if benchmark returns are net of withholding taxes if this information is available (Standard 4.A.20). (Study Session 18, LOS 43.k)

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Of the following, with respect to GIPS, the one that is not a requirement and is only a recommendation is:

A) a list of other firms contained within a parent company.

B) how the firm defines itself to determine the total assets.

C) a list of any composites that have been discontinued within the last five years.

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Standard 4.B.5: The Standards make the recommendation that if a parent company contains multiple defined firms, each firm within the parent company should disclose a list of the other firms contained within the parent company.
Standard 4.A.2: The definition of the “firm” used to determine the firm’s total assets and firm wide compliance is a required disclosure.
Standard 0.A.10: The list must include not only all the firm’s current composites but also any that have been discontinued within the last five years.

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With respect to fees and to reporting returns under GIPS, firms:

A) can report returns either net of fees or gross of fees.

B) must report returns gross of fees and never net of fees.

C) must report returns net of fees and never gross of fees.

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Firms can be reported either way, but they must be labeled accordingly (Standards 4.A.5 and 4.A.6).

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With respect to reporting a composite’s creation date and any changes in a composite’s name, which is a requirement of GIPS?

A) The creation date but not changes in a composite’s name.

B) Changes in a composite’s name but not its creation date.

C) Both the creation date and any changes in a composite’s name.

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Standard 4.A.10: firms must disclose the composite creation date.
Standard 4.A.18: firms must disclose any changes in a composite’s name.

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In January 2003, the Medusco Investment firm has decided to present its performance history in compliance with the Global Investment Performance Standards (GIPS). Medusco was formed on January 1, 1992, and has never before presented its performance results in compliance with the GIPS standards. Which of the following actions must Medusco take in order to claim GIPS compliance?

A) Present GIPS-compliant performance results for the 5-year period from January 1, 1998, through December 31, 2002, and report five additional years of non-GIPS-compliant performance with a disclosure explaining why the performance in the earlier years is not GIPS-compliant.

B) Present GIPS-compliant performance results for the 5-year period from January 1, 1998, through December 31, 2002.

C) Retroactively comply with GIPS for periods after January 1, 2000, and report non-GIPS-compliant performance results for the periods January 1, 1993, through December 31, 1999, with a disclosure explaining why these earlier years are not GIPS-compliant.

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In order to claim GIPS compliance, Medusco must present at least five years of annual investment performance results that are compliant with GIPS. Medusco may, at its discretion, add an additional five years of results that are not GIPS-compliant to their five-year compliant history with a disclosure of the period of noncompliance and an explanation of why the presentation for these periods is not GIPS compliant (Standard 4.A.15 and 5.A.1.a).

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Assume that on January 1, 2005, a 15-year old firm with no Global Investment Performance Standards (GIPS) compliant performance history wishes to claim compliance with the GIPS standards. Which of the following accurately reflects the appropriate action for the firm to take?

A) Comply with GIPS for the year beginning January 1, 2004, and report four additional years of performance history (five total) and disclose why the earlier years are not GIPS compliant.

B) Comply with the GIPS standards for the 5-year period January 1, 2000, through December 31, 2004, and report five additional years of non-GIPS-compliant performance and disclosure of why the performance in the earlier years is not GIPS compliant.

C) Comply with GIPS for the year beginning January 1, 2004, and report nine additional years of performance history (ten total) and disclose why the earlier years are not GIPS compliant.

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In order to claim GIPS compliance, a firm must present at least five years of annual investment performance that is compliant with GIPS. If a firm or composite is less than five years old, the performance since the inception of the firm or composite must be presented. A firm may link a non-GIPS-compliant performance record to their 5-year compliant history as long as only GIPS-compliant performance is presented for periods after January 1, 2000, and the firm discloses the periods of non-compliance with an explanation of why the presentation is not GIPS compliant (Standard 4.A.15 and 5.A.1.a).

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Which of the following is NOT a Global Investment Performance Standards (GIPS) presentation and reporting requirement?

A) Performance for periods of less than one year must be annualized.

B) A measure of the dispersion of individual component portfolio returns around the aggregate composite return.

C) The composite creation date.

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Standard 5.A.4 requires that performance for periods of less than one year must not be annualized.