Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com FinQuiz.com CFA Level III Item-set - Solution Study Session 18 June 2018 Copyright © 2010-2018 FinQuiz.com All rights reserved Copying, reproduction or redistribution of this material is strictly prohibited info@finquiz.com FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com FinQuiz Level III 2018 – Item-sets Solution Reading 34: Overview of the Global Investment Performance Standards Question ID: 9117 Correct Answer: C In order to claim compliance with the GIPS standards, a firm must be an investment management firm, subsidiary, or division held out to clients as a distinct business entity (I.0.A.12) A distinct business entity is further defined as a “unit, department, office or division that is organizationally and functionally separate from other units, departments, offices or divisions and that retains discretion over the assets that it manages and that should have autonomy over the investmentdecision making process.” In the case of SA, the branch is organizationally and functionally separate from the rest of the branches This implies that its structure enables it to claim compliance to the GIPS standards The trading rule does not serve as a compliance impediment to the branch In the case of MAATD, the fact that it is organizationally separate from the other branches does not make it independent from the rest of the firm and thus does not enable it to qualify as a distinct business entity eligible for compliance This is because: international purchase and sale decisions are sanctioned by SA’s chief investment officer making MAATD’s investment advisor decisions and processes dependent on SA This occurs despite the relative independence of the domestic trading activity Since compliance is achieved for the entire firm, rather than for individual client accounts, MAATD’s domestic trading does not make it eligible for claiming compliance In the context of GM, it is not eligible for compliance with the GIPS standards as its investment process for pensions, endowments and foundations is heavily constrained by sponsor restrictions and dependent on the sponsor and MAA’s chief investment officer approval These restrictions and approval requirements dampen the independence of the investment process In the context of life and non-life insurance clients, the fact that GM and MAA’s chief investment officer are required to coordinate during the performance evaluation period, dampens the independence of the investment process Due to the reasons provided, GM is not eligible for claiming compliance with the GIPS standards Question ID: 9118 Correct Answer: A In order to claim compliance with the GIPS standards, a firm must be an investment management firm, subsidiary, or division held out to clients as a distinct business entity (I.0.A.12) A distinct business entity is further defined as a “unit, department, office or division that is organizationally and functionally separate from other units, departments, offices or divisions and that FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com retains discretion over the assets that it manages and that should have autonomy over the investmentdecision making process.” In the case of SA, the branch is organizationally and functionally separate from the rest of the branches This implies that its structure enables it to claim compliance to the GIPS standards The trading rule does not serve as a compliance impediment to the branch In the case of MAATD, the fact that it is organizationally separate from the other branches does not make it independent from the rest of the firm and thus does not enable it to qualify as a distinct business entity eligible for compliance This is because: international purchase and sale decisions are sanctioned by SA’s chief investment officer making MAATD’s investment advisor decisions and processes dependent on SA This occurs despite the relative independence of the domestic trading activity Since compliance is achieved for the entire firm, rather than for individual client accounts, MAATD’s domestic trading does not make it eligible for claiming compliance In the context of GM, it is not eligible for compliance with the GIPS standards as its investment process for pensions, endowments and foundations is heavily constrained by sponsor restrictions and dependent on the sponsor and MAA’s chief investment officer approval These restrictions and approval requirements dampen the independence of the investment process In the context of life and non-life insurance clients, the fact that GM and MAA’s chief investment officer are required to coordinate during the performance evaluation period, dampens the independence of the investment process Due to the reasons provided, GM is not eligible for claiming compliance with the GIPS standards Question ID: 9119 Correct Answer: C Based on MAA’s compliance policies, the correct version of each policy is highlighted below Policy 1: A firm that has been defined for the purpose of GIPS may undergo subsequent changes in its corporate structure or organizational design However the change may not be reflected as an alteration of historical composite results In other words, the change must be applied prospectively (I.0.A.15) Policy 2: Firms are encouraged to undertake verification (I.0.B.2) Policy 3: All data and information which is necessary to support the performance presentation and calculation methodologies included in a compliant presentation must be captured and maintained (I.1.A.1) Policy 4: For periods prior to January 1, 2001, portfolios must be valued at least quarterly For periods beginning on or after January 1, 2001, portfolios must be valued at least monthly For periods beginning on or after January 1, 2010, portfolios must be valued on the date of all large cash flows and as of each calendar month-end or the last business day of each month (I.1.A.3-4) FinQuiz.com © 2018 - All rights reserved Reading 34 Policy 5: Overview of the Global Investment Performance Standards FinQuiz.com Valuations should be obtained from qualified independent third parties In addition, switching from one source to another merely to improve the stated performance does not reflect the spirits of the standards (I.1.B.2) Assuming each policy has been correctly defined, policies 1, and are requirements whereas policies and are recommendations of the standards Question ID: 9120 Correct Answer: B In the context of the correct version of the policies provided in the solution to Part 3: Policy 1: violates the GIPS standards should it be applied This is because the standards require a prospective change as opposed to a retrospective change Policy 2: does not violate the GIPS standards should it be applied This is because it is in agreement with the recommendations Policy 3: does not violate the GIPS standards should it be applied Policy 4: does not violate the GIPS standards should it be applied It is in agreement with the requirement Policy 5: violates the GIPS standards should it be applied Switching from one source to another merely to improve the stated valuation, as stated by the recommendation, reflects a violation of the standards Question ID: 9121 Correct Answer: B The requirement of GIPS pertaining to the recording of client transactions is that firms must use trade-date accounting for the purpose of performance measurement for periods beginning January 1, 2005 Prior to this date, transactions which were recorded in accordance with settlement-date accounting need not be restated (I.1.A.5) Trade-date accounting incorporates recording a transaction on the date of occurrence as opposed to when cash is paid or received for it Settlement-date accounting refers to recording transactions when cash is received or paid for the transactions In the case of client 1, the transaction recording date reflects a violation of the standards This is because: the transaction occurred on January 1, 2005 and was paid for on January 20, 2005 Thus the transaction should have been recorded when the purchase was made (i.e January 1, 2005) and not in accordance with settlement-date accounting (i.e the cash payment date) In the case of client 2, the transaction recording date does not reflect a violation of the standards This is because: although the transaction was recorded on the date cash was paid for the transaction (June 1, 2004) and not the date of purchase (March 15, 2004), this date is prior to the January 1, 2005 requirement Prior to January 1, 2005 firms are permitted to use settlement-date accounting FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com In case of client 3, the transaction recording date reflects a violation of the standards This is because: the transaction occurred on July 12, 2009 and was paid for to MAA on July 21, 2009 Thus the transaction should have been recorded when the sale was made (i.e July 12, 2009) and not in accordance with settlement-date accounting (i.e the cash receipt date) Question ID: 9122 Correct Answer: C The GIPS standards require firms to display the percentage of total firm assets represented by a composite or the amount of total firm assets at the end of each annual period The phrase total firm assets refers to the aggregate fair value (irrespective of discretionary or fee-paying) of all assets for which the firm has investment management responsibility (I.0.A.13) Since all the portfolios are completely managed by MAA and reflect fair values, the percentage to include in total firm assets is 100% for each client The break down is provided below In the case of client 1, 100% of the portfolio assets are included as total firm assets (70% + 25% + 5%) In the case of client 2, 100% of the portfolio assets are included as total firm assets (35% + 40% + 25%) In the case of client 3, 100% of the portfolio assets are included as total firm assets (15% + 85% + 0%) Question ID: 9125 Correct Answer: B One of the characteristics of the GIPS standards is that it requires firms to comply with the local law in the event of a conflict between the standards and local laws In the event that the firm does not comply with the stricter local law it is in violation of the standards’ requirements Since the Moroccan laws require firms to undertake verification using its appointed regulatory body, Aaros and Mitchell, should the firm not undertake verification or undertake it using a third party other than that sanctioned, it will violate the standards Since TA is situated in the Northern Morocco, the state laws of the country will be applicable (and not U.S laws) Question ID: 9126 Correct Answer: A The GIPS standards require firms to document their policies and procedures in establishing and maintaining compliance with the standards (I.0.A.5) The policies which need to be documented include the firm’s error correction policies and procedures By not documenting these policies, the firm will violate a key requirement of the standards FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com Question ID: 9127 Correct Answer: B Policy I: The GIPS standards require firms to adopt composite specific policies pertaining to the treatment of external cash flows and follow those policies consistently Furthermore, the policy should describe the firm’s methodology for computing time-weighted returns and the firm’s assumptions about the timing of capital inflows and outflows (I.2.A.2) Although the firm policy defines a large external cash flow as required by the standards, it is applied to the aggregate of the clients’ individual portfolios On the other hand, the standard requires the firm to define its cash flows based on a composite level as opposed to aggregate client portfolios which are managed using a variety of investment styles Policy II: For periods prior to January 1, 2005 the GIPS standards permit the use of the Original Dietz method where cash flows are assumed to occur in the middle of the month (I.2.A.2) TA’s policy complies with standards’ requirements Policy III: For periods beginning on or after January 1, 2005 the standards require firms must approximate rates of returns that adjust for daily weighted external cash flows For periods beginning January 1, 2010 firms must value portfolios on the date of all large external cash flows Furthermore, the standards require that for periods falling after January 1, 2001 firms must calculate monthly returns Prior to that, quarterly returns may be calculated (I.2.A.2) By not following the above GIPS requirements and calculating returns adjusted for weighted external cash flows for periods on or after January 1, 2010, TA has violated the requirements of the standards 10 Question ID: 9128 Correct Answer: B Policy I: In the case of portfolio valuations, the GIPS standards contain the following requirements: For periods prior to January 1, 2001 portfolios must be valued at least quarterly; For periods beginning on or after January 1, 2001 portfolios must be valued at least monthly; For periods beginning on or after January 1, 2010, portfolios must be valued on the date of all large external cash flows and as of each calendar month-end or the last business day of the month (I.1.A.3-4) Large cash flows occur more frequently than a monthly or quarterly basis Thus by valuing portfolios on the date of external cash flows (since its compliance year: 1999), the firm has not violated the requirements and recommendations of the standards Policies II and III: For periods beginning January 1, 2006 the standards require that the firm’s composites and the portfolios within the composite have consistent beginning and ending annual valuation dates Unless the composite is reported on a non-calendar fiscal year, the beginning and ending valuation dates must be the last date of the calendar year or corporate accounting year (I.1.A.7) FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com Although the composites that contain the indexed; semi-active and active portfolios are valued on an annual basis, the two composites are valued on different dates, December 31st and June 30th, respectively This requirement applies to all of the firms’ composites and by not adhering completely to the requirement, policies II and III constitute a violation of the standards 11 Question ID: 9129 Correct Answer: C Policy I: GIPS standards require firms to include the returns from cash and cash equivalents in total return calculations (I.2.A.3) By not doing so, TA has violated the best practice requirements Policy II: GIPS standards require firms to calculate returns after the deduction of actual and not estimated trading expenses (I.2.A.4) In the event the trading expenses cannot be broken from the bundled fees, the gross return must be reduced by the entire amount of the bundle fee or the portion of the bundle fee which includes direct trading expenses (I.2.A.5.a) When calculating net of fees returns, the entire bundled fee or the portion of the bundled fee that includes investment management fees and trading expenses must be deducted (I.2.1.5.b) TA violates this standard as it should deduct the entire bundled fee or the portion including direct trading expenses as opposed to investment management expenses Policy III: Provision I.2.B.1 recommends that returns should be calculated net of non-reclaimable withholding taxes on interest, dividends and capital gains Withholding taxes subject to reclamation should be accrued until recovery takes place Withholding taxes that cannot be recovered should be treated as transaction costs and deducted from the portfolio before the returns are calculated TA has incorrectly treated reclaimable and non-reclaimable withholding taxes and thus is not in compliance with this recommendation 12 Question ID: 9130 Correct Answer: B The formula to calculate returns under the Modified Dietz method is: ି బ ି ி R Dietz = ା (∑భ (ி ௪ ) బ R Dietz = సభ $ଶ଼,ସହ, ି ଶହ,ହହ, ି ଵ,ଶହ, ି ଼, యభషఱ యభషమమ × $ଵ,ଶହ,ቁ ା ቀ ×$଼,ቁቃ యభ యభ $ଶହ,ହହ, ା ቂቀ R Dietz = 3.168019% ≈ 3.17% 13 Question ID: 9143 Correct Answer: C In order to claim compliance with the GIPS standards, firms are recommended to undertake verification This verification can only be done using an independent third party Amongst the sources listed by Gerard, only source can be used for verification FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com Source 1: The reason why Horace Shaw may not be used is because of his past involvement with the firm The consultant may still have relationships with company employees and/or executives which may undermine the objectivity of the process Source 3: The reason why H.M & S may not be an appropriate candidate is because the firm is involved in providing external auditing as well as other services to the firm which may present a conflict of interest (for example, reviewing their own work) should the auditors undertake a verification of the firm 14 Question ID: 9144 Correct Answer: A The GIPS standards require firms to define composites based on similar investment strategies/ and/or objectives Composites must include all portfolios that meet the composites definition (I.3.A.4) The hiring of the new manager who specializes in derivative securities requires the creation of a new composite within which all the portfolios containing derivative securities must be included 15 Question ID: 9145 Correct Answer: B Policy 1: GIPS require firms to calculate composite returns by asset weighting individual portfolio returns using beginning of the period values or a method that reflects both beginning of the period values and external cash flows (I.2.A.6) Furthermore, the standards require that for periods beginning from January 1, 2010, composite return should be calculated by asset weighting individual portfolio returns at least monthly (I.2.A.7) Policy complies with these requirements Policy 3: The standards prohibit firms from linking the performance of simulated or model portfolios with actual performance Composites should not include simulated, backtested or model portfolios that not have genuine holdings (I.3.A.3) By simulating historical emerging market returns to represent actual returns and including the performance of those portfolios in the Emerging Market composite the firm has violated the standards’ requirements with respect to policy 16 Question ID: 9146 Correct Answer: A GIPS standards require all actual-fee paying discretionary portfolios to be included in at least one composite The firm may include non-fee paying portfolios with appropriate disclosure Nondiscretionary portfolios are not permitted to be included in any composite (I.3.A.1) With respect to the terminated portfolios, GIPS require firms to include the portfolio in the historical performance of the composite up to the last full measurement period that the portfolio was under management (I.3.A.6) FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com The breach of the tolerance limit requires the portfolio to be removed from the composite as it is no longer considered discretionary as defined by the limit The portfolio will need to be removed at the start of the next performance measurement period accordingly 17 Question ID: 9147 Correct Answer: C The GIPS standards require firms to define composites based on similar investment strategies/ and or objectives Composites must include all portfolios that meet the composites definition (I.3.A.4) In the case of Manager A, low dividend yield stocks (growth stocks) and low price-to-book stocks (value stocks) represent two different investment categories that require two different composites In the case of Manager B, a passive investment in large-cap blended index funds is a style completely different (from managers A and C) which requires a different composite In the case of Manager C, investing in distressed companies represents an asset category which differs from those handled by Managers A and B and thus requires its own composite Thus the firm requires different composites for the three investment managerial styles (2+ 1+1 composite(s) for managers A, B and C, respectively) 18 Question ID: 9148 Correct Answer: C The formula for calculating the return for a portfolio under the beginning of period value and weighted cash flows (rC) is as follows: n RC = ∑ r i =1 pi × V pi V ∑ pi In order to calculate the return, the true time-weighted return (under the modified Dietz method needs to be calculated $ଵଶ଼.ହଷ – ଵଷସ. ି ହ.ା ଵଶ.ହ R Modified Dietz: Portfolio A = $ଵଷସ. ା ሺହ. ×.ଽሻ ା ሺି ଵଶ.ହ×.ସହሻ = 1.068560% $ଵଵଽ.ଶଵି ଽଽ.ଶଷ ି ଵ. ି ଶ.ହହ ିଵସ.ସସ ା ଼.ହ R Modified Dietz: Portfolio B = $ଽଽ.ଶଷ ା ሺଵ. ×.ଽሻ ା ሺଶ.ହହ×.ሻ ା ሺଵସ.ସସ ×.ଵሻ ା ሺି ଼.ହ ×.ଵଷሻ = 1.256357% $଼଼. – ଵଵଷ.ଶଶା ଵଽ.ସହ ା .ହଷ R Modified Dietz: Portfolio C = $ଵଵଷ.ଶଶ ା ሺି ଵଽ.ସହ ×.ସହሻ ା ሺି .ହଷ×.ଶଽሻ = 0.740930% $ଵଵ.ଶହି ଵଵ.ଵ ି ଵଶ.ହ ା ଽ.ଽ ା ସ.ହ ା ଵ.ସହ ି ଼.଼ R Modified Dietz: Portfolio D = $ଵଵ.ଵ ା ሺଵଶ.ହ ×.ଽሻ ା ሺିଽ.ଽ×.ሻ ା ሺି ସ.ହ ×.ଵሻ ା ሺି ଵ.ସହ ×.ସହሻ ା ሺ଼.଼ ×.ଶଽሻ = 0.615349% The numerator of the formula for calculating composite returns, se below, (beginning of period value and weighted external cash flows) is calculated for each individual portfolio: V pi: Portfolio A = $134.60 + ሺ5.00 × 0.97ሻ + ሺ− 12.50 × 0.45ሻ = $133.8250 V pi: Portfolio B = $99.23 + ሺ10.00 × 0.97ሻ + ሺ2.55 × 0.77ሻ + ሺ14.44 × 0.61ሻ + ሺ− 8.50 × 0.13ሻ FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com = $118.5969 V pi: Portfolio C = $113.22 + ሺ− 19.45 × 0.45ሻ + ሺ− 6.53 × 0.29ሻ = $102.5738 V pi: Portfolio D = $110.10 + ሺ12.50 × 0.97ሻ + ሺ−9.90 × 0.77ሻ + ሺ− 4.50 × 0.61ሻ + ሺ− 1.45 × 0.45ሻ + ሺ8.80 × 0.29ሻ = $113.7565 The sum of the four values provides a total of $468.7522 ($133.8250 + 118.5969 + 102.5738 + 113.7565) Using the returns calculated under the Modified Dietz method as well as the numerator values (see below) for each portfolio, the returns under the required method for each portfolio are calculated as follows: $ଵଷଷ.଼ଶହ R Composite: Portfolio A = 0.01068560 × $ସ଼.ହଶଶ × 100% $ଵଵ଼.ହଽଽ R Composite: Portfolio B = 0.01256357 × $ସ଼.ହଶଶ × 100% $ଵଶ.ହଷ଼ R Composite: Portfolio C = 0.00740930 × $ସ଼.ହଶଶ × 100% $ଵଵଷ.ହହ R Composite: Portfolio D = 0.00615349 × $ସ଼.ହଶଶ × 100% 0.305065% 0.317865% 0.162133% 0.149333% The total composite return is 0.934396% ≈ 0.93% 19 Question ID: 9183 Correct Answer: C GIPS standards requires firms to show investment performance for a minimum of five years, or since the inception of the firm or composite if either has existed for less than five years After presenting five years of GIPS compliant history, the firm must add annual performance each subsequent year building a minimum of 10 years The firm has satisfied this requirement as it has presented a performance track record of more than five years Thus by solely considering this requirement, the firm is eligible to claim compliance with the standards 20 Question ID: 9184 Correct Answer: B The GIPS standards have laid down the precise wording of the claim of compliance in provision I.4.A.1 The wording will differ depending on whether the firm has been verified or not In the case where a firm has fully complied with the GIPS standards’ requirements and has been verified, the firm needs to issue the following two paragraph statement with the first focusing on the compliance claim and being: FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com “[Insert name of the 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 the firm] has been independently verified for the periods [insert dates] The verification report is/are available upon request.” Vieira Investment Limited has complied with the standards’ requirements with respect to its compliance claim The second paragraph of the compliance statement, which is the verification statement, is: “Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis, and (2) the firm’s processes and procedures are designed to calculate and present performance in compliance with the GIPS standards Verification does not ensure the accuracy of any specific composite presentation.” The firm has not complied with the standards’ requirements as it has 1) omitted what the verification process assesses and 2) incorrectly addresses the statement, “Verification does not ensure the accuracy of any specific composite presentation.” 21 Question ID: 9185 Correct Answer: A Provision I.5.A.1.e requires firms to present total benchmark returns for each annual period Furthermore firms must disclose the description of the benchmark and if a custom benchmark or a combination of benchmarks are used, the firm must disclose the benchmark components, weights and rebalancing process (I.4.A.31) By not presenting annual benchmark returns or providing a description of the benchmark used (whether standard or custom) the firm has violated these two standards The standards permit firms to link non-compliant performance to GIPS compliant performance as long as the firm presents compliant performance after January 1, 2000 and discloses the period of non-compliance (I.4.A.15 and I.5.A.3) Since the firm has not presented non-complaint performance, this standard ceases to apply GIPS standards require firm to either present the percentage of total firm assets represented by the composite or the amount of total firm assets at the end of each period (I.5.A.1.c) The firm has reported the total firm assets at the end of each period and thus has not violated the standards with respect to this requirement 22 Question ID: 9186 Correct Answer: C Note 3: The GIPS standards require firms to disclose the composite creation date (I.4.A.10) The firm has complied with this requirement as reflected in note GIPS standards prohibit firms from annualizing partial year returns to represent a full year’s returns Annualizing returns is equivalent to simulating returns and is not allowed under the standards FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com (I.5.A.4) The firm has violated the standards with respect to this requirement by annualizing the 2005 returns The standards require firms to disclose the availability upon request of the firm’s list of composite descriptions (I.4.A.11) The firm has complied with the standard with respect to this requirement Overall, note represents a violation due to the annualizing of partial year returns Note 4: The GIPS standards require firms to disclose the currency used to express performance (I.4.A.7) The firm has complied with this requirement as reflected in note Note 5: When presenting gross-of-fees returns firms must disclose if they are deducting any other returns in addition to the actual trading expenses (I.4.A.5) When presenting net-of-fees returns, firms must disclose if any other fees are deducted in addition to the actual trading expenses and investment management fees (I.4.A.6) Firms must disclose if returns are net of performance based fees The firm has complied with both these standards by disclosing the performance based fee deducted Note 8: The GIPS standards require firms to use trade data accounting for performance measurement for periods beginning January 1, 2005 (I.1.A.5) However by using settlement-date accounting for the period of 2005 constitutes a violation 23 Question ID: 9187 Correct Answer: C Note 6: Firms are required to report for each annual period a measure of internal dispersion of returns earned by individual portfolios in the composite (I.5.A.1.i) The GIPS glossary defines acceptable methods for internal dispersion These include: the high/low method; the equally-weighted or asset-weighted standard deviation of portfolio returns; interquartile range Using downside deviation is not an acceptable method Note 7: Provision I.5.A.2.a states that for periods beginning January 1, 2011 firms must present the three year annualized ex post standard deviation (using monthly returns) for the composite and the benchmark The periodicity of the returns for the benchmark and the composite must be identical (I.5.A.2.b) By presenting monthly annualized returns for the composite and quarterly annualized returns for the benchmark, the firm has violated the standard’s requirements 24 Question ID: 9188 Correct Answer: C In the case of portfolio valuations, the GIPS standards contain the following requirements: FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com For periods prior to January 1, 2001 portfolios must be valued at least quarterly; For periods beginning on or after January 1, 2001 portfolios must be valued at least monthly; For periods beginning on or after January 1, 2010, portfolios must be valued on the date of all large external cash flows and as of each calendar month-end or the last business day of the month (I.1.A.3-4) However by presenting quarterly returns for years 2002 to 2009 as well for the periods 2010 to 2011, the firm has violated the standards The standards recommend that valuations should be obtained from a qualified independent party (I.1.B.2) By obtaining valuations from a qualified third party, the firm has complied with this recommendation 25 Question ID: 9220 Correct Answer: A The following securities fall outside the scope of the GIPS real estate provisions and are not classified as real estate investments: publically traded real estate securities, such as real estate investment trusts traded on the NYSE or AMEX; commercial mortgage-backed securities; private debt investments, including commercial and residential loans whose expected return is linked to the contractual interest rates without any participation in the economic performance of the underlying real estate On the other hand, insurance company separate accounts and a private interest in a property where some portion of the return to the investor at the time of investment is related to the performance of the underlying real estate are considered as real estate and are addressed by the provisions Zia has incorrectly identified I (insurance company separate accounts) and II (an interest in a property with a portion of returns related to the performance of the underlying property) as not being addressed by the standards 26 Question ID: 9221 Correct Answer: C Private equity provisions pertain to private equity investments made by fixed life, fixed commitment vehicles including: primary fund vehicles making direct investments as opposed to investing in other fund vehicles; funds of Funds investing in closed end funds Closed end funds are defined by the GIPS glossary as a type of investment vehicle where the number of investors, total committed capital, and life are fixed and is not open to subscriptions or redemptions The private equity provisions not address open-end or ever-green funds (these investment vehicles are addressed by the main GIPS standards) FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com Zia has incorrectly identified I (Fixed term private equity funds which place restrictions on subscriptions and redemptions) and III (Fund vehicles which make direct investments as opposed to investing in other fund vehicles) as not being addressed by the standards FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com 27 Question ID: 9222 Correct Answer: C For periods beginning on or after January 1, 2011 firms must value real estate investments at fair value and in accordance with the GIPS Valuation Principles; for earlier periods firms must value real estate investments at market value (I.6.A.1) For periods beginning on or after January 1, 2008 real estate investments must be valued at least quarterly and for periods beginning on or after January 1, 2010 they must be valued as of each quarter end or the last business day of each quarter For earlier periods real estate investments must be valued at least once every 12 months (I.6.A.2-3) Since the firm’s policy does not require a shift in the frequency of valuations for periods commencing January 1, 2008, in the case of real estate, the firm’s policy does not comply with the provisions This is because the policy states, “For all the performance periods presented…”, which does not imply a change in policy to comply with the post 2008 requirements For periods ending on or after January 1, 2011, private equity investments must be valued in accordance with the definition of fair value and in accordance with GIPS Valuation Principles and they must be valued at least annually (I.7.A.1-2) The firm’s policy complies with this private equity valuation provision Provision I.6.A.4 states that for periods prior to January 1, 2012 firms must conduct real estate external valuations at least once every 36 months For periods beginning on or after January 1, 2012, firms must conduct external valuations at least once every 12 months subject to client agreement The firm’s external valuation policy does comply with this requirement by requiring more frequent valuations prior to January 1, 2010 (which falls within the first time slot: prior to January 1, 2012) as well as after January 1, 2010 (which include periods from both time slots: prior to and after January 1, 2012) 28 Question ID: 9223 Correct Answer: A Policy I: In the case of real estate investments, the provisions require firms to calculate annualized SIIRR using quarterly cash flows at a minimum (I.6.A.17-18) as well as present the composite’s net-offees SI-IRR through the end of each annual period For periods beginning on or after January 1, 2011, when the initial period is less than a full year, firms must present the net-of-fees SI-IRR through the end of the initial annual period without annualizing the partial year returns (I.6.A.23) Policy I complies with both these requirements Policy II: For periods ending on or after January 1, 2011, firms must calculate annualized SI-IRR using daily cash flows and for earlier periods using either daily or monthly cash flows (I.7.A.3) Firms must present and clearly identify gross and net-of fees SI-IRR of the composite through the end of each annual period For periods beginning January 1, 2011 when the initial period is shorter than a full year, firms must present the initial non-annualized gross and net of-fees SI-IRR through the end of the initial annual period (I.7.A.21) The firm’s policy has not complied with the former requirement as it does not require presenting netof-fees SIRR FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com 29 Question ID: 9224 Correct Answer: C A: Firms are required to disclose the frequency of independent external valuations by credentialed property appraisers or valuers (I.6.A.10.e) The firm’s disclosure requirement complies with the provision B: For any performance presented prior to January 1, 2006 which does not comply with the GIPS standards, firms must disclose the periods of non-compliance (I.6.A.11) The firm’s policy does not comply with this provision because it does not address the 2006/7 non-compliance presented periods as required by the standards C: For periods beginning January 1, 2011 firms must disclose material changes to valuation policies and/or methodologies (I.6.A.10.c) The firm’s policy does not comply fully with the standards’ requirements as only material changes are required to be disclosed D: Firms are recommended to disclose the accounting basis for the portfolios included in the composite (I.6.B.3) This is not required by the provisions 30 Question ID: 9225 Correct Answer: B A: Firms must disclose the calculation methodology used for the benchmark (I.7.A.16) This has been correctly addressed by the disclosure policy and is a requirement which will be satisfied if followed B: For periods beginning January 1, 2011 firms must disclose material changes to valuation policies and/or methodologies (I.7.A.14) The firm’s policy does not comply fully with the standards’ requirements as only material changes are required to be disclosed This has been incorrectly addressed by the disclosure policy and is a requirement which will be not be completely satisfied if followed C: Firms must disclose the vintage year of the composite (I.7.A.11) This has been correctly addressed by the disclosure policy and is a requirement which will be satisfied if followed 31 Question ID: 9227 Correct Answer: A Firms must calculate portfolio returns after the deduction of actual trading expenses (I.2.A.4) By not stating whether the composite returns are calculated gross or net of fees, the firm has violated this standard The standards require firms to present the amount of assets for each composite (I.5.A.1.d) By not doing so the firm has violated the standards The GIPS standards recommend firms to present cumulative returns for all periods (I.5.B.2.a) By not doing so, the firm has not violated the standards The standards require firms to report a measure of internal dispersion of the returns earned by individual portfolios in the composite (I.5.A.1.i) provided they are more than six portfolios By not presenting the internal dispersion measures for the years 2007 and 2008, the firm has not violated the standards as the composite contained less than portfolios for those years Provision 1.5.2.A.a states that for periods ending on or after January 1, 2011, firms must present, as of each annual period end, the three-year annualized ex post standard deviation (using monthly returns) for the composite and the benchmark (I.5.2.A.a) However the inclusion of the measure for the year 2010 does not reflect a violation of the standard FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com 32 Question ID: 9228 Correct Answer: A A firm may only claim compliance on a firm-wide basis and may not claim compliance for individual composites (I.0.A.4) Thus Joyce Advisory Limited cannot claim compliance for its equity composite only Whether the compliance claim has been accurately presented in note is not relevant in this context as a compliance statement pertaining to individual composites is neither addressed nor permitted under the standards 33 Question ID: 9229 Correct Answer: B Policy I: The standards require firms to capture and maintain all data and information necessary to support all information in a compliant presentation Thus the policy complies with this requirement Policy II: Firms must disclose that the polices used for valuing portfolios, calculating returns and preparing compliant presentations are available upon request (I.4.A.12) The firm’s policy does not comply with this disclosure requirement as the firm does not provide these policies immediately upon request 34 Question ID: 9230 Correct Answer: C Note 3: The GIPS standards require firms to use trade-date accounting for the purpose of performance measurement for periods beginning January 1, 2005 (I.1.A.5) This requirement is considered to be satisfied if the firm recognizes assets and liabilities within three days of entering into the transaction By recognizing the assets and liabilities on a fortnight basis, the firm’s policy does not comply with the standards’ requirement Note 4: In the case of portfolio valuations, the GIPS standards contain the following requirements: For periods prior to January 1, 2001 portfolios must be valued at least quarterly; For periods beginning on or after January 1, 2001 portfolios must be valued at least monthly; For periods beginning on or after January 1, 2010, portfolios must be valued on the date of all large external cash flows and as of each calendar month-end or the last business day of the month (I.1.A.3-4) In order to comply with the standards’ requirements, the firm needs to value portfolio at least on a monthly basis for the years 2007-2009 and value the portfolios on the date of large cash flows from 2010 onwards Thus the firm has not complied with these requirements for the periods presented prior to 2010 For periods beginning on or after January 1, 2011 firms must value portfolios in accordance with the definition of fair value (I.1.A.2) Fair values supersede market values However valuing portfolios using market values for periods falling prior to the 2011 deadline does not violate the standards’ requirements FinQuiz.com © 2018 - All rights reserved Reading 34 Overview of the Global Investment Performance Standards FinQuiz.com Note violates the standards’ requirements with respect to frequency of portfolio valuations Note 5: Provision I.2.A.2 specifies the use of time-weighted rates of return that adjust for external cash flows For periods beginning on or after January 1, 2005 firms must use approximate rates of return that adjust for daily weighted external cash flows For periods beginning on or after January 1, 2010 firms must value portfolios on the date of all large external cash flows Periodic returns must be geometrically linked The firm’s policy complies with this requirement Provision I.2.A.2 also requires that for periods beginning on or after January 1, 2001, firms must calculate portfolio returns at least monthly and for earlier periods may calculate quarterly By presenting quarterly returns for 2007, the firm has violated this requirement Note violates the provision’s requirements with respect to the frequency of return calculations 35 Question ID: 9231 Correct Answer: B Note 6: For periods beginning on or after January 1, 2010 composite returns must be calculated by asset weighting the individual portfolio returns at least monthly (I.2.A.7) using beginning of period values or beginning of period values and weighted cash flows The formula for calculating composite returns using the former method incorporates the portfolio’s periodic return which may be calculated using the Modified Dietz method or time-weighted rate of return method The firm’s policy complies with this requirement Note 7: Provision I.3.A.1 permits firms to include non-fee paying discretionary portfolios in its composites However, the firm must make appropriate disclosures Provision I.5.A.6 stipulates that firms must disclose the percentage of composite assets represented by non-fee paying portfolios as of each annual period Although the firm has complied with the Provision I.3.A.1, it has failed to comply with the latter provision as it has not disclosed the relevant percentage 36 Question ID: 9232 Correct Answer: B If the firm changes its benchmark, the firm must describe the change, disclose the date it became effective, and explain the reason for the change (I.4.A.30) Although the firm has explained the reason for the change and described the change it has not disclosed the date of change The firm is not required to disclose a description of the new benchmark under this disclosure requirement FinQuiz.com © 2018 - All rights reserved .. .Reading 34 Overview of the Global Investment Performance Standards FinQuiz. com FinQuiz Level III 2018 – Item- sets Solution Reading 34 : Overview of the Global Investment... $ 134 .60 + ሺ5.00 × 0.97ሻ + ሺ− 12.50 × 0.45ሻ = $ 133 .8250 V pi: Portfolio B = $99. 23 + ሺ10.00 × 0.97ሻ + ሺ2.55 × 0.77ሻ + ሺ14.44 × 0.61ሻ + 8.50 ì 0. 13 FinQuiz. com â 2018 - All rights reserved Reading. .. 0.0125 635 7 × $ସ଼.ହଶଶ × 100% $ଵଶ.ହଷ଼ R Composite: Portfolio C = 0.00740 930 × $ସ଼.ହଶଶ × 100% $ଵଵଷ.ହହ R Composite: Portfolio D = 0.0061 534 9 × $ସ଼.ହଶଶ × 100% 0 .30 5065% 0 .31 7865% 0.162 133 % 0.14 933 3%