Ethics Flashcards
How to deal with fair trading (AMC)
Managers must allocate trades fairly so that some client accounts are not routinely traded first or receive preferential treatment. Where possible, Managers should use block trades and allocate shares on a pro-rata basis by using an average price or some other method that ensures fair and equitable allocations.
Minimum requirement of record retention
In the absence of such regulation, Managers must determine the appropriate minimum time frame for keeping the organization’s records. Unless otherwise
required by local law or regulation Managers should keep records for at
least seven years.
GIPS compliance
A firm claiming GIPS compliance must adhere to all GIPS guidelines across its products—no selective compliance is allowed.
What Does GIPS Cover?
Return calculation methods.
Benchmark comparisons.
Full disclosure of fees, methodologies, and risks.
Key elements of GIPS
All fee-paying discretionary accounts must be included in at least one composite.
Firms must calculate returns using GIPS-approved methodologies and disclose details about fees, risks, and benchmarks.
Verification:
Optional but recommended. Involves an independent third-party review to test compliance and boost credibility.
Definition of a firm
The firm must be defined as an investment firm, subsidiary, or division presented to the public as a distinct business entity.
Time weighted return
TWR is a method used to calculate period-by-period returns that reflect the change in value of a portfolio, eliminating the impact of external cash flows. It helps focus on the investment manager’s performance, independent of client deposits or withdrawals.
Frequency of valuation
Portfolios (excluding private market investments) must be valued at least monthly.
Private market investments (e.g., real estate, private equity) are valued quarterly.
Large Cash Flows: If a large cash flow occurs within a month, the portfolio must be valued on the cash flow date, and a sub-period return must be calculated.
Treatment of expenses and fees
Returns must be calculated after transaction costs (e.g., brokerage commissions, exchange fees, taxes, spreads, etc.). For private market investments, transaction costs should include legal, financial, and advisory fees related to buying, selling, or restructuring investments.
For portfolios with bundled fees (e.g., a single fee that covers management, transaction, and custody fees), if transaction costs cannot be separated, the gross-of-fees return must be reduced by the entire bundled fee or by that portion attributable to transaction costs.
definition of a composite
A composite is an aggregation of one or more portfolios managed according to a similar investment mandate, objective, or strategy.
Purpose: To fairly represent a firm’s investment results for a specific strategy, aligning with the GIPS standards’ ethical goals of transparency and full disclosure.
Special cases for composites
Portfolios with client-imposed constraints or legal restrictions may still qualify as discretionary unless such constraints materially impact the manager’s ability to implement the strategy.
Portfolios affected by frequent, large cash flows may be deemed non-discretionary if these flows impede the strategy.
GIPS Guidelines on Model Portfolios
Simulated, hypothetical, or backtested performance cannot be included in composites.
Portfolios using seed money can be included in composites if managed in alignment with the investment strategy.
Minimum reporting period
At least 5 years of annual performance data must be shown (if the composite has been in existence for less than 5 years, data since inception is acceptable).
Extend performance annually to reach 10 years of data.
Core elements of gips composite report
Annual composite and benchmark returns.
Number of portfolios (if six or more) in the composite at each period-end.
Assets in the composite at the end of each period.
Total firm assets at the end of each period.
Internal dispersion measure (if there are six or more portfolios in the composite for the full year).
Three-year annualized ex post standard deviation of composite and benchmark returns (if monthly returns are available).
