Title Level III V6 LM05 Essay Quiz.pdf ✅

Level III Overview of the Global Investment Performance Standards Essay Quiz Copyright © IFT. All rights reserved www.ift.world Page 1 TOPIC: ETHICAL AND PROFESSIONAL STANDARDS TOTAL POINT VALUE OF THIS QUESTION SET IS 18 POINTS Stone Mountain Asset Management Case Scenario Ben Chipwell, senior portfolio manager of Stone Mountain Asset Management (SMAM), prepares to present SMAM’s performance to prospective clients. The following exhibit shows the firm’s performance with subsequent disclosure notes: Exhibit 1 Stone Mountain Asset Management US Mid-Cap Value Equity Composite Period Gross Return (%) Benchmark Return (%) Internal Dispersion (%) Number of Accounts Total Composite Assets ($ millions) Total Firm Assets ($ millions) 2019 26 24 6.10 60 110 650 2018 15 15 4.50 50 95 500 2017 6 2 5.75 40 80 375 2016 -12 -14 5.14 30 75 275 2015 -20 -23 4.35 22 90 150 Notes 1. SMAM has prepared this report in compliance with the Global Investment Performance Standards (GIPS). A qualified third party has independently verified the US Mid-Cap Value Equity Composite to be GIPS compliant. The verification report was issued for the composite only and omitted SMAM. The report states that SMAM complied with all composite construction requirements for the US Mid-Cap Value Equity Composite. It calculates and presents a performance in compliance with GIPS standards. 2. The firm is defined as an independent investment manager that invests exclusively in US large-cap, US midcap, and US small-cap equity securities for US resident clients. A complete list and description of all the firm’s composites, valuing portfolios, and calculating performance is available upon request. The firm uses time-weighted rates of return. Subperiod rates of return are geometrically linked. Cash equivalent instruments are included in rate-of-return calculations. Returns are calculated quarterly. 3. The US Mid-Cap Value Composite invests in US mid-cap value equity securities. The composite consists of all fee-paying and non-fee-paying discretionary accounts. It includes companies with a minimum market cap of $0.5 billion, lower price-to-book ratios, and lower forecasted growth values relative to others in the mid-cap space. Each portfolio position is selected after in-depth analysis. Nondiscretionary portfolios are not included in any composite. The composite benchmark is the Russell Mid Cap Value Index consisting of 564 stocks with a market cap of stocks ranging from $0.5 billion to $19 billion with lower P/Es
Level III Overview of the Global Investment Performance Standards Essay Quiz Copyright © IFT. All rights reserved www.ift.world Page 2 and P/B ratios than other midcap stocks. 4. Gross-of-fees returns are reduced by any trading expenses incurred during the period but before investment management fees, and trading expenses include custodial fees. All clients pay investment management a flat fee of 1% on the month-end account value plus a 10-basis- point performance fee whenever the composite return exceeds the benchmark return by 100 basis points. 5. Internal dispersion is the asset-weighted standard deviation of the annual gross returns of the portfolios included in SMAM’s US Mid-Cap Value Equity Composite. Jim Briggs, the chief executive officer of SMAM, asks about using other internal dispersion measures that clients can easily understand. Chipwell responds that the high/low range is not used because of certain disadvantages. Briggs also wants to know about the requirement under GIPS standards for presenting the composite’s variability. Later talking to newly hired analysts, Chipwell explains the firm’s time-weighted return calculations methodology. He explains that SMAM uses the following two ways: i. asset weighting the individual portfolio returns using beginning-of-period values; or ii. using a method that reflects both beginning-of-period values and external cash flows. He shares the following information with the analysts and asks them to calculate the time- weighted return of a composite of 3 portfolios using the two ways. Exhibit 2 Beginning assets (31 March) Cash Flow Weighting Factor Portfolio ($ Thousands) A B C Total 120 100 125 345.00 External cash flows 8 April 0.73 5.00 -10.00 -5.00 20 April 0.33 15.00 -5.25 9.75 29 April 0.03 -6.50 2.50 -4.00 Ending value of assets (30 April) 125.65 109.00 112.55 347.20 Beginning assets + Weighted cash flows 123.65 104.76 116.04 344.45 time-weighted return for month of April 0.42% 0.36% 0.40% Note: Weighted cash flows reflect two-decimal-place precision in the weighting factors. A. Based on the Notes, identify the items included in the SMAM performance report that do not comply with GIPS standards. Justify your response.
Level III Overview of the Global Investment Performance Standards Essay Quiz Copyright © IFT. All rights reserved www.ift.world Page 3 • Third party verification • Verification of single composite • Including cash equivalents in returns • Frequency of return calculations • Gross returns excluding management fees • Trading expenses, including custodial fees
Level III Overview of the Global Investment Performance Standards Essay Quiz Copyright © IFT. All rights reserved www.ift.world Page 4 B. Describe an advantage and a disadvantage of using the high/low range. State the requirement under the GIPS standards for presenting the variability of the composite returns. Justify your response with one reason. • high/low range • GIPS Standards require that firms must present: > 2-year annualized ex ante standard deviation of only the composite monthly returns. > 3-year annualized ex post standard deviation of composite and benchmark monthly returns. > 5-year annualized ex post standard deviation of composite and benchmark monthly returns. C. Calculate the April composite return by i. Asset-weighting the individual portfolio returns using beginning-of-period values. ii. Asset-weighting the individual portfolio returns using a method that reflects both beginning-of-period values and external cash flows.