10.4 Introduction to Global Investments Performance Standards (GIPS)

Question 1

Misleading performance reporting practices that have been used include:

Answer 1

Representative accounts: Presenting top-performing portfolios to be a representative account for an entire mandate

Survivorship bias: Adjusting the historical return for a composite by removing the impact of weaker portfolios that have subsequently been terminated

Varying time periods: Using time periods that are arbitrary and favorable to the portfolio

Question 2

Firms claiming compliance have only two options

Answer 2

comply fully with GIPS or not at all

Question 3

Compliance must be claimed on a

Answer 3

firm-wide basis

Question 4

Partial compliance is

Answer 4

not an option

Question 5

Who Benefits from Compliance?

Answer 5

Firms

Investors

Oversight bodies

Question 6

The key concepts to understand with respect to the GIPS standards are:

Answer 6

These are ethical standards that are designed to achieve fair representation and full disclosure. However, they do not necessarily address every aspect of performance measurement and they will continue to evolve over time.

To claim compliance, firms must meet all applicable GIPS standards and should adhere to all recommendations.

Requirements and recommendations are found in the GIPS standards, as well as Guidance Statements, interpretations, and Questions & Answers (Q&As) published by CFA Institute and the GIPS standards governing bodies.

The GIPS standards require firms to use certain calculation methodologies and asset valuation methods in order to generate accurate, comparable performance presentations.

All actual, fee-paying, discretionary segregated accounts must be included in at least one composite. Pooled funds must also be included in any appropriate composite based on mandate, objective, or strategy.

Question 7

a composite

Answer 7

an aggregation of one or more portfolios

must include all the fee-paying, discretionary accounts that are managed in accordance with a particular mandate, objective, or strategy

Question 8

The purpose of verification is to determine the following:

Answer 8

1. Whether the asset manager has complied with the GIPS composite construction requirements
2. Whether the asset manager’s performance reporting policies and procedures are consistent with GIPS

Question 9

A firm that does not adopt the GIPS standards could mischaracterize its overall performance by presenting a performance history:

a) that includes terminated portfolios.

b) composed of a single top-performing portfolio.

c) for an investment mandate over all periods since the firm’s inception.

Answer 9

b) composed of a single top-performing portfolio.

Selecting a top-performing portfolio to represent a firm’s overall investment results for a specific mandate, also known as using representative accounts, is a misleading practice that is not allowed under the GIPS standards

Question 10

Firms that claim compliance with the GIPS standards are required to receive a verification:

a) before the firm can initially claim compliance.

b) after the firm has claimed compliance for 12 months.

c) never; verification is not required.

Answer 10

c) never; verification is not required.

Question 11

Which of the following is not a commonly perceived benefit of the GIPS standards?

a) Comparability of results across managers that claim compliance

b) Adherence to regulatory requirements

c) Increased confidence by investors and beneficiaries

Answer 11

b) Adherence to regulatory requirements

Question 12

When defining the firm, the GIPS standards recommend that firms should:

a) adopt the narrowest, most relevant definition of the firm.

b) adopt the broadest, most meaningful definition of the firm.

c) exclude offices operating under different brand names.

Answer 12

b) adopt the broadest, most meaningful definition of the firm.

Question 13

A composite return reflects the performance of:

a) all portfolios managed by the firm, regardless of investment strategy.

b) all discretionary portfolios that meet the composite definition.

c) all discretionary and non-discretionary portfolios that meet the composite definition.

Answer 13

a) all portfolios managed by the firm, regardless of investment strategy.

Question 14

Which of the following statements is least likely correct with regards to the nine major sections comprising the GIPS® standards?

a) To claim compliance, firms need only to calculate their performance according to GIPS requirements

b) All requirements must be met in to be fully compliant with the GIPS

c) Firms are encouraged to adopt and implement the recommendations

Answer 14

a) To claim compliance, firms need only to calculate their performance according to GIPS requirements

Question 15

Which of the following statement most likely summarizes the requirement of a firm to maintain a list of descriptions?

a) Firms must maintain a list of composite descriptions as well as a list of descriptions for both limited and broad distribution pooled funds.

b) Firms must include terminated composites and terminated limited distribution pooled funds on their lists of composite and pooled funds for at least five years.

c) Firms must maintain a list of composite descriptions as well as a list of descriptions for limited distribution pooled funds, but only a list of names for broad distribution pooled funds.

Answer 15

c) Firms must maintain a list of composite descriptions as well as a list of descriptions for limited distribution pooled funds, but only a list of names for broad distribution pooled funds.

Question 16

Which of the following statements related to why the GIPS® standards were created is least likely correct? The GIPS standards were created to:

a) provide clients certainty in what is presented and allow them to make reasonable comparisons.

b) dentify a set of ethical principles for firms to follow in calculating and presenting historical investment results.

c) establish a standardized, industry-wide approach for investment firms to follow.

Answer 16

a) provide clients certainty in what is presented and allow them to make reasonable comparisons.

Question 17

According to the Global Investment Performance Standards (GIPS®), which of the following is not a part of the verification process? Testing whether the:

a) firm has implemented policies and procedures compliant with all the composite maintenance requirements.

b) verification is undertaken by the compliance department in the absence of a third party.

c) firm’s processes and procedures are designed to calculate results in compliance with GIPS standards.

Answer 17

b) verification is undertaken by the compliance department in the absence of a third party.

Verification must be performed by an independent third party. A firm cannot perform its own verification.

Question 18

erformance that is not compliant with the GIPS® standards is most likely allowed to be linked with performance that is compliant with the GIPS standards in which of the following scenarios?

a) Wrap fee composite for a firm whose claim of compliance began on 1 January 2006.

b) Real estate pooled fund for a firm whose claim of compliance began on 1 January 2010.

c) Large-cap equity composite for a firm whose claim of compliance began on 1 January 2001.

Answer 18

a) Wrap fee composite for a firm whose claim of compliance began on 1 January 2006.

The minimum effective compliance date for a wrap fee composite is 1 January 2006. A wrap fee composite for a firm whose claim of compliance began on 1 January 2006 could link performance that is not compliant with the GIPS standards to performance that is compliant with the GIPS standards. A firm may link performance that is not compliant with the GIPS standards to performance that is compliant with the GIPS standards provided that only performance that is compliant with the GIPS standards is presented for periods after the minimum effective compliance date, which differs depending on the asset type:

• 1 January 2006 for real estate and private equity composites and pooled funds, as well as wrap fee composites.
• 1 January 2000 for all other composites and pooled funds.

Question 19

Which of the following is part of the nine major sections of the GIPS® standards?

a) Performance fees

b) Input data

c) Disclosure

Answer 19

b) Input data

because the major sections of the GIPS standards do not include performance fees or disclosure. The major sections are: fundamentals of compliance, input data, and calculation methodology, composite and pooled fund maintenance, composite time-weighted return report, composite money-weighted return report, pooled fund time-weighted return report, pooled fund money-weighted return report, and GIPS advertising guidelines.