GIPS - Everyone's "favorite" topic

[cheapchanman]

From 2013 Mock (PM Section) - Question #58

4. Gross-of-fees returns are presented before investment management fees and custodial fees but after trading expenses. All clients pay an investment management flat fee of 75 basis points 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. With respect to gross-of-fees returns, Note 4 is least likely compliant with GIPS required standards in its treatment of: A. custodial fees. B. performance fees. C. trading expenses. Answer = A__A is correct because custodial fees should not be considered a component of direct trading expenses. Is it just me, or does the answer explanation not make sense? Because I’m pretty sure that note 4 already said that Gross-of-Fees returns didn’t include custodial fees, just the direct trading expenses…

[dmlf]

yep, in thi case answer C would be correct as well, since custodial fees would be included

[RobRoy]

The asperger section of the CFA material…

[Nininiya]

i think gross only excludes management fee am i right?

[cheapchanman]

@Nininiya

i think gross only excludes management fee am i right?

The gross-of-fees return is defined as the return on investments reduced by any trading expenses

[cheapchanman]

Found a discussion from last year, this should clear up the confusion

http://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91320674

[cheapchanman]

@cpk123

Please note an erratum will be posted later tonight on this question.

Questions 55 to 60 Global Investment Performance Standards Bud Walter Case Scenario: Note #4 in the vignette should read as follows:

1. Gross-of-fees returns are presented before investment management fees but after custodial fees and trading expenses. All clients pay an investment management flat fee of 75 basis points 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.

Question #58: The question feedback should read as follows:

A is correct. Only direct trading expenses should be deducted in calculating gross-of-fees returns. Custodial fees should not be considered a component of direct trading expenses. Thus, gross-of-fees returns should be calculated before custodial fees are deducted, not after.