Title 11.4 Introduction To The Global Investment Performance Standards (2).pdf ✅

1. An investment firm has multiple subsidiaries across countries. The subsidiaries have different business names but operate under the same brand name. When defining the firm to claim compliance with GIPS standards, which subsidiaries should the firm most appropriately include?  A. Any subsidiaries operating under the same brand name B. Only subsidiaries using the business name of the investment firm C. Only subsidiaries located in the country the firm is seeking compliance Explanation The fundamentals of compliance require that a company seeking compliance with GIPS standards must properly define its firm. A proper definition ensures: the whole firm is complying with GIPS standards, an accurate accounting of total firm assets, and representative composite creation. GIPS standards state that an investment firm seeking compliance should adopt the broadest definition of the firm. When a company operates in multiple countries or regions, the scope should include all subsidiaries or offices that operate under the same brand name. This includes any individual subsidiaries that may have different business names. For example, if a company has a subsidiary in another country with a different business name but that operates under the same brand name, it should be included under the definition of the firm for GIPS compliance. (Choice B) The definition of the firm should include all geographical subsidiaries operating under the same brand name, regardless of the actual names of the individual companies. (Choice C) GIPS compliance encompasses the whole firm and is not done on a country-by-country basis. Things to remember: GIPS standards state that an investment firm seeking compliance should adopt the broadest definition of the firm. When the company operates in multiple countries/regions, the definition should include all subsidiaries or offices that operate under the same brand name, regardless of the business names of the individual companies. Describe the fundamentals of compliance, including the recommendations of the GIPS Standards with respect to the definition of the firm and the firm’s definition of discretion LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.
2. When constructing a composite, which of the following is least likely a requirement of GIPS?  A. Each composite must include two or more discretionary portfolios. B. A portfolio's inclusion in a composite is determined on an ex ante basis. C. All actual, fee-paying, discretionary portfolios are required to be in at least one composite. Explanation A composite is an aggregated portfolio formed by grouping one or more portfolios that a firm manages according to a specific style or objective. Firms report the portfolios' combined performance as if it were one collective unit. Most composites are constructed using many portfolios. However, a composite can consist of only one portfolio if the style or objective is unique to that portfolio. To be GIPS-compliant, a firm must include all actual, discretionary, fee-paying, portfolios in at least one composite (Choice C). Hypothetical portfolios cannot be included since composites must represent actual results. The term "discretionary" indicates that the client has given the manager control to make investment decisions (ie, buy or sell securities). Including only the portfolios that the manager controls provides the best evidence of the manager's skill. (Choice B) The decision whether to include a portfolio in a composite must be made prior to the reporting period; this is referred to as ex ante, rather than ex post. This prevents managers from "cherry picking" or selecting only those portfolios that boost the composite's performance. Things to remember: A composite is a collection of one or more portfolios that are managed under a common strategy or objective. To be GIPS-compliant, a firm must include all actual, discretionary, fee-paying, portfolios in at least one composite. The decision to include a portfolio in a composite in done prior to calculating the composite's performance (ie, ex ante basis). Explain the purpose of composites in performance reporting LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.
3. An investment management firm most likely can claim compliance with the Global Investment Performance Standards (GIPS) if it:  A. includes only discretionary portfolios in its composites. B. clearly distinguishes composites that do and do not comply with GIPS. C. excludes composites for which it has less than five years of performance history. Explanation Compliance with the Global Investment Performance Standards (GIPS) requires firms to calculate and present composite returns. A composite is a group of discretionary portfolios that a firm manages according to a common style or strategy. A discretionary portfolio is one in which the manager makes the investment decisions. For example, a firm's large-cap value composite would consist of the portfolios that have a strategy that invests in large-cap value stocks. A firm must present a composite for each of its different strategies, but nondiscretionary portfolios are not included in a composite. (Choice B) GIPS are a set of detailed provisions and definitions concerning input data, calculation, composite construction, and so on. For a firm to claim compliance, all composites must be prepared according to GIPS; the Standards specifically disallow firms to claim compliance "except for" noncompliant composites. (Choice C) GIPS generally require firms to present a minimum of five years of returns for each composite. However, with respect to newer composites, a firm complies with GIPS if it presents information for each year of a composite's existence. Even if a composite has existed for less than five years, it must be included for a firm to claim compliance with GIPS. Things to remember: The Global Investment Performance Standards (GIPS) are uniform methods to calculate and present investment performance results. Firms must report at least five years of composite information for each strategy or style that they manage. A composite consists of all discretionary portfolios that are managed using a common style or strategy. Describe the key concepts of the GIPS standards for firms LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.
4. A firm creating and maintaining GIPS-compliant composites is most likely required to:  A. assign portfolios to composites on an ex ante basis. B. ensure that each composite contains multiple portfolios. C. include every portfolio with a similar strategy in a composite. Explanation A composite aggregates all a firm's portfolios that are managed according to a certain investment mandate, objective, or strategy. GIPS require that each fee-paying, discretionary portfolio must be included in at least one composite. The decision to include a portfolio in a composite must be based on pre-established criteria, referred to as ex ante, rather than ex post (ie, after the fact), criteria. This prevents managers from presenting only their best-performing portfolios in the composite. Including all similarly managed portfolios provides a complete representation of the firm's performance with that strategy. (Choice B) Including only one portfolio in a composite is allowed if it is the firm's only portfolio using that investment mandate, objective, or strategy. (Choice C) A firm is required only to include fee-paying, discretionary portfolios in composites. Non–fee-paying portfolios that are discretionary also may be included. However, all nondiscretionary portfolios must be excluded since they reflect clients', not the firm's, decisions and performance. Things to remember: A composite is an aggregate of one or more portfolios based on a specific investment mandate, objective, or strategy. The decision to include a portfolio in a composite must be based on pre-established (ie, ex ante) criteria. Explain the purpose of composites in performance reporting LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.