3.3) Duties to clients III (D) : Performance presentation

Question 1

What is the substandard 3(D) for duties to clients?

Answer 1

Performance presentation

Question 2

What is perfromance presentation?

Answer 2

The communication of investment results must be fair, accurate, and complete.

Question 3

How is performance presentation implemented? (2)

Answer 3

• Fair, accurate and complete presentation of performance is required.
• For brief presentations, detailed info must be available on request and indicate that the presentation has offered only limited info.

Question 4

What should members not do when it comes to performamnce presentation? (3)

Answer 4

• Do not misstate performance or mislead clients about investment performance.
• Do not misrepresent past performance, and do not state or imply the ability to
  achieve a return similar to that achieved in the past.
• Do not selectively omit performance.

Question 5

Encourage firms to adhere to Global Investment _______________ (GIPS) Standards.

Answer 5

Performance

Question 6

What are the recommendations for members to adhere to perfromance presentation? (3)

Answer 6

• Consider level of understanding of clients presented to.
• Include all appropriate disclosures to fully explain results (e.g., model results
  included, gross or net of fees, etc.).
• Maintain data and records used to calculate the performance being presented.

Question 7

Example 28: Protea Investments have seven funds under management. Over the past year the Value Fund’s growth averaged 20% (which is approximately the same as the market), while some of the other funds performed below this benchmark. Over the past five years, the Value Fund’s performance varied between 5% and 20%. Mark De Kock, Chief Investment Officer of Protea Investments, in his presentation to a group of clients who are invested in a
number of the company’s funds, states the following: “Your fund should grow at roughly 20% over the next 12 months”. Is de Kock’s statement in contravention of the Standards of Professional Conduct, and if so, which standards?

Answer 7

Solution: De Kock is in contravention of both Standards III(D) and I(C).
- He is giving an assurance regarding future performance, which is prohibited by I(C).
- He is also contravening III(D), because (a) he is making a general statement on several funds based on one fund only, (b) he is making a statement based on one year’s performance only, and (c) he is not disclosing the context
adequately (the fund’s performance was in line with the market).

Question 8

Example 29: While working for Dolphin Equities, Prenelan Maharaj had an exceptional track record. The funds he managed had an average return of 20% over ten years, which was well above the market. Maharaj recently joined Cape Capital (CC), who uses Maharaj’s historical performance to market its funds, without indicating that it was achieved at a previous employer. Are CC’s actions
in contravention of Standard III(D)?

Answer 8

Solution: CC’s marketing is in breach of Standard III(D). It should be clearly stated that Maharaj’s performance was achieved at a previous employer, as other company-specific factors that may no longer be applicable could have played a role in his historical achievements.