Questions 55 to 60 relate to Global Investment Performance Standards
Bud Walter Case Scenario
Bud Walter is the chief investment officer of Wryte Capital Management (WCM). He is meeting with
T.M. McGourn, a prospective client, to discuss Wryte’s investment performance as presented in Exhibit
1 and subsequent disclosure notes:
Exhibit 1
Wryte Capital Management
U.S. Large-Cap Equity Composite
Number
Gross
Firm
Benchmark
Composite
Internal
Assets ($m)
Assets
of
Dispersion
Return
Return
Year
%
Portfolios
($m)
2007 15 15 5.2 20 100 175
2008 22 20 6.1 40 200 275
2009 –20 –25 5.7 30 150 200
2010 11 10 5.2 45 225 300
2011 20 20 4.7 50 250 350
Wryte Capital Management (WCM) has prepared this report in compliance with Global Investment
Performance Standards (GIPS). The U.S. Large-Cap Equity Composite has been independently verified by
a qualified third party to be GIPS compliant. The verification report was issued only for the composite
and not for WCM. It states that during 2009, 2010, and 2011, WCM complied with all composite
construction requirements for the composite and that WCM policies are designed to calculate and
present performance in compliance with GIPS standards.
Notes:
1. The firm is defined as an independent investment manager that invests exclusively in U.S. large-cap,
U.S. midcap, and U.S. small-cap equity securities for U.S. resident clients. WCM’s policy for valuing
portfolios and calculating performance is available upon request. WCM’s calculation methodology is
to use 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
or when large external cash flows (as defined by WCM) take place.
2. The U.S. Large-Cap Equity Composite includes all actual fee-paying portfolios. Each portfolio
contains positions in large-cap stocks, which are selected by WCM following an extensive
independent analysis. Nondiscretionary portfolios are not included in any composite. WCM does not
include in any composite its large-cap model portfolio, which is utilized during the investment
selection process.
3. The composite benchmark is the S&P 500 Index, which represents the size-weighted returns of the
500 largest (as measured by market capitalization) U.S.-based publicly traded companies.
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. Internal dispersion is the equal-weighted standard deviation of the annual gross returns of the five
portfolios included in WMC’s Large-Cap Equity Composite.
McGourn asks Walter why he uses standard deviation as the measure of internal dispersion and
whether there are better dispersion measures. Walter responds, “Standard deviation has the advantage
of comparability across investment firms. Other measures, such as the high/low range and the
interquartile range, are skewed by outliers.”
Finally, McGourn asks Walter about WCM’s policies regarding the valuation of its investments. Walter
states that WCM uses a valuation hierarchy based on items 1 through 4 as follows:
Item 1. Observable quoted market prices for similar investments in active markets.
Item 2. Quoted prices for similar investments in markets that are not active.
Item 3. Market-based inputs other than quoted prices that are not observable for the investment.
Item 4. When no quotes or other market inputs are available, we use WCM estimates based on
quantitative models and assumptions.
55. Is WCM most likely correct in claiming compliance based on the verification report?
A. Yes
B. No, because of the level at which verification is claimed
C. No, because of the timeframe for which verification is claimed
56. WCM’s methodology for calculating performance, as disclosed in Note 1, is least likely consistent
with GIPS standards for:
A. external cash flows.
B. geometrically linked returns.
C. frequency of return calculations.
57. Is WCM most likely compliant with GIPS required standards for composite construction as
disclosed in Note 2?
A. Yes
B. No, because of how the large-cap model portfolio is treated
C. No, because of how nondiscretionary portfolios are treated
58. 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.
59. With respect to relative merits of internal dispersion measures, Walter is least likely correct
about:
A. high/low range.
B. interquartile range.
C. standard deviation.
60. Is Walter’s response to McGourn’s inquiry regarding WCM’s valuation hierarchy most likely
correct?
A. Yes.
B. No, item 4 from the valuation hierarchy should be excluded.
C. No, the valuation hierarchy should be reordered as item 2, item 1, item 3, and item 4.
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