GIPS from CFA topic test (Ng)

This section is driving me INSANE. As an example, here’s part of a question from the topic tests which just fucks me off: Arnott and Ng then move on to discuss one of Rune’s GIPS-compliant performance presentations, provided in Exhibit 1 [omitted] Notes:

  1. Rune Managers is an investment manager registered with the US SEC. Rune Managers has divisions in Europe, Asia, and the United States that invest in various equity and bond strategies.

  2. The Rune Mid-Capitalization Equity Composite includes all institutional portfolios that invest in mid-capitalization US equities, with the goal of providing long-term capital growth and steady income from dividends by investing in low price-to-earnings, undervalued securities.

  3. A complete list and description of Rune Managers’ composites, as well as policies for valuing portfolios and preparing compliant presentations, are available upon request.

  4. The composite was created on 30 November 2005.

  5. Leverage, derivatives, and short positions are not used by this strategy.

  6. Performance is expressed in US dollars. The returns include the reinvestment of all income. Gross-of-fees returns are presented before management and custodial fees but after all trading expenses. Net-of-fees returns are calculated by deducting the actual fees of the accounts from the gross composite return.

  7. The management fee schedule is as follows: 0.80% on the first $10 million, 0.55% on the next $40 million, 0.40% on assets greater than $50 million.

  8. This presentation is not required to conform to any laws or regulations that conflict with the GIPS standards.

  9. Internal dispersion is calculated using the asset-weighted standard deviation of annual gross returns of those portfolios that were included in the composite for the entire year.

  10. The three-year annualized standard deviation measures the variability of the composite and the benchmark returns during the preceding 36-month period. The standard deviation is not presented for 2006 through 2010 because monthly composite and benchmark returns were not available, and it is not required for periods prior to 2011.

Question: Regarding the disclosures contained in the notes to Exhibit 1, the notes most likely required are: - 6, 7 and 9 - 2, 7 and 8 - 1, 5 and 6

Now, I thought that the definition of the firm was a required disclosure. Apparently not. Here’s the answer to the topic test: “The currency used to express performance, whether any fees other than trading expenses are deducted from gross-of-fees returns, whether any fees other than trading expenses and management fees are deducted from net-of-fees returns, the fee schedule, and a measure of internal dispersion are all required disclosures for compliance with the GIPS standards.” Then here’s the relevant text from the book:

Several provisions concern disclosures related to the GIPS-compliant firm. The definition of the “firm” used to determine the firm’s total assets and firm-wide compliance is a required disclosure (I.4.A.2).

Can anyone clarify? Thanks, John

The definition of the firm is required. It’s number 5 that’s not required for the third answer because it’s a negative assurance. (You don’t have to say that leverage and derivatives are not used.)

  1. Can someone confirm if the Note 2 and 10 are required disclosure?

I think they are. Number 2 is the composite definition while the number 10 is the Standard 5A2.

  1. Note 3 I believe is require as well. However, based on question 6 below. Note 3 looks like is an error. Anyone knows the reason?

6 of 6

Regarding Exhibit 1, which item is least likely an error in the presentation?

Note 3 Composite percentage of firm assets Three-year standard deviation Correct.

The annualized three-year ex post standard deviation of monthly returns must be presented for both the composite and the benchmark for each annual period after 1 January 2011. Firms are required to disclose that policies for valuing portfolios, calculating returns, and preparing compliant presentations are available upon request.

Thank you!

I remember composite definition is required , so Note 2 is required disclosure.

Not sure about standard deviation of Note 10.

Note 3 is not a required disclosure.

I think both Note 3 and note 10 are required disclosures. Only note 8 and note 5 are not required.

yes, the cfa answers says std dev disclosure after 1 jan 2011, are required for benchmark and composite. So note 10 are required.

Note 3 are required according to cfa answer.

I found that GIPS is very dry and very difficult to remember.

I agree. However, based on that question 6 it asked for the LEAST LIKELY to be an error. It picked " Composite percentage of firm assets". So, I guess it is trying to say note 3 is an error?

there is an error in note 3, it should be valuing, calculating and preparing presentation.

the following quoted text, is it firm definition? is it required or recommended disclosure?

“Long Pond is an independent investment firm founded in May 1998 and has a single office in Seattle, WA. The firm manages portfolios in various equity, fixed­income, and real estate strategies.”

Oh Man… Hope this type of question will not be shown on the test.

I believe so it is required just like the note 1 of this question.

Also, I just ran into a GIPS question as well.

Report the performance for Moss’s account fro the second quarter of 2013. He computes the return using the Modified Dietz method.

The answer states “He may not report a Modified Dietz calculation for Moss.” reason is 200/2,500=11.1% which is considered large external cash flow. Unless Moss can document that hte Modified Ditz calculation of 11.1% does not deviate materially from the current requirements, it may not be used.

I didn’t see this somewhere in the Kaplan syaing only small cash flow can be used with Modified method. Can someone explain this?

GIPS is easy, watch the schweser video and it all comes together. I haven’t missed a GIPS problem since David H pointed out what to focus on.

GIPS is easy?

“Long Pond is an independent investment firm founded in May 1998 and has a single office in Seattle, WA. The firm manages portfolios in various equity, fixed­income, and real estate strategies.”

The CFA answer says this is not a required GIPS disclosure? Why?

Here’s my guess.

The firm description should not include the portfolio strategies (“The firm manages portfolios in various equity, fixed income, and real estate strategies” part).

Looking forward to finding out the answer. Thanks!

From GIPS: Modified dietz’s advantage is it doesn’t assume cash flow occurs at midpoint (like original dietz), and weights the cash flow by time held in the portfolio. Cons: 1) suffers when one or more larger external cash flows occur; 2) when cash flows occur during period of market volatility (so return is non-linear).

strategies are not “required” in defining the firm.

Great to know! Thanks, Honeybadger! I guess the large cash flow will mess both modified and original dietz, right?

ya easy, there are only like 10 things you really have to know. (the requirements). Everything else isn’t needed (recommended). When I see that statement I think it’s probably somehwere in 1-3 of notes. All that’s required there is GIPS compliance stmt, Firm Descrip, Comp descript.

strategies and stuff is all extra stuff that’s good to have but again “not required”. little effort to remember the 10 or so requirements to get like 90% of the questions for GIPS right. There are other areas of the test that deserve more time

Thank you for sharing ! help to clear my mind

GIPS are easy. Behavioral Finance is easy. Derivatives are easy. Immunization, too. Living is easy especially at summertime.

I’ve read through the GIPS section about a month ago, and it seemed pretty overwhelming with tons of nitty-gritty details. Can you share your list of “10 things”?