Reading 2-III: Standards of Professional Conduct & Guidan manager, center, making, style, label

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Session 1: Ethical and Professional Standards
Reading 2-III: Standards of Professional Conduct & Guidance: Duties to Clients

LOS D.: Performance Presentation.

 

 

Paul Salyer,a portfolio manager, is making a presentation to a prospective client. Paul says that as a new portfolio manager, he made an average annual rate of return of 50% in the last two years at his previous firm and that based on this, he can guarantee a 50% return to the client. Which of the following statements is in accordance with Standard III(D), Performance Presentation?

A) Stating his past performance as long as it is fact.

B) Implying that he can guarantee a return.

C) Imputing his past performance to future performance.

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There is no evidence that he’s lying about his past performance. He is in violation for implying that he can guarantee performance, for using short-term performance, and for imputing the manager’s past performance to future performance.

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A money management firm has created a new junk-bond fund. When the firm advertised the new fund at its issuance, they used care to accurately compute the returns from the past 10 years for all assets in the fund. The firm used the current portfolio weights to determine an average annual historical return equal to 18% and claim an 18% annual historical return in their advertising literature. With respect to Standard III(D), Performance Presentation, this is:

A) in compliance.

B) a violation because the Standard prohibits computing historical returns on risky assets like junk bonds.

C) a violation because the advertisement implies the firm generated this return.

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Reporting the historical returns of all assets now in the fund introduces a survivorship bias. Also, the advertisement is misleading because the fund just came into existence and has no historical record. Thus, the firm has misled the public as to their performance history.

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A money manager is meeting with a prospect. She gives the client a list of stocks and says, “These are the winners I picked this past year for my clients. Their double-digit returns indicate the type of returns I can earn for you.” The list includes stocks the manager had picked for her clients, and each stock has listed with it an accurately measured return that exceeds 10%. Is this a violation of Standard III(D), Performance Presentation?

A) No, because the manager had the historical information in writing.

B) Yes, unless the positions listed constitute a complete presentation (i.e., there were no stocks omitted that did not perform in the double digits).

C) Yes, because the manager cannot reveal historical returns of recent stock picks.

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Standard III(D) requires fair representations concerning past and potential future performance. Unless the list of the “winners” includes all the positions that the firm held, the manager is misrepresenting past performance. The following statement is questionable: “Their double-digit returns indicate the type of returns I can earn for you,” but the action of submitting a partial list is clearly a violation. The manager should have information on past performance in writing.

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A money manager, who is a member of CFA Institute, suggests during phone calls to his clients that, “I hope you will relay to your friends the great returns I earned for you this past year.” The manager had generated above average returns in the past year. Is this a violation of Standard III(D), Performance Presentation?

A) Yes, because the intended message fails the test of completeness as required under the standard.

B) Yes, because the Standard forbids members asking their clients to say anything about how well the member has done.

C) Not if it is true.

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Standard III(D) requires that members communicate performance in a fair, accurate, and complete fashion, and covers both written and oral communication. Asking someone to advertise only one year’s performance is unlikely to be representative since this constitutes a timeframe that is too short.

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Nancy Korthauer, CFA, has launched a new hedge fund called the Korthauer Tautology Fund and is actively soliciting clients from competitor’s firms. Client presentations are necessarily brief and often take place with the prospective client’s current investment advisor in the room. The Code and Standards require that:

A) member or candidate provide (on request) additional detail information which supports the abbreviated presentation.

B) a prospective client’s current investment advisor not participate in meetings.

C) all client presentations provide a thorough review of all elements of the investment management process. Abbreviated presentations are forbidden.

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See Standard III(D). When presentations are brief, additional detail which supports the abbreviated presentation information must be provided on request. Best practice dictates that the member or candidate should make reference to the abbreviated nature of the presentation.

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