54. Is Smith’s assertion about cash flow matching most likely correct?
A. Yes.
B. No, he is incorrect regarding cash balances.
C. No, he is incorrect regarding the interest rate assumption.
Anton Case Scenario
Beatriz Anton, CFA, is the chief compliance officer at Long Pond Advisors, an asset management firm
catering to institutional investors. Long Pond is not currently GIPS compliant, but Anton would like to
market the firm as being compliant as soon as possible. To assist Anton in achieving compliance, she
hires Ana Basco, CFA, from Nantucket Advisors to provide guidance on achieving compliance.
At their initial meeting to discuss a framework for the implementation of GIPS standards, Anton asks
Basco what she believes the fundamentals of GIPS compliance encompass. Basco responds, “A good
starting point is input data because the Standards rely on the integrity of input data to accurately
calculate results. Portfolios must be valued in accordance with the definition of fair value, not cost or
book values. In fact, fair value supersedes market value. Transactions are reflected in the portfolio at
settlement when the exchange of cash, securities, and paperwork involved in a transaction is
completed. Accrual accounting is used for fixed income securities and all other assets that accrue
interest income; dividend-paying equities accrue dividends on the ex-dividend date.”
Basco then asks Anton about Long Pond’s policies for return calculation methodologies. Anton responds
that she has recently implemented the following polices:
Policy 1: Total return is calculated for portfolios using time-weighted rates of return computed by
geometrically linking the periodic returns. Both realized and unrealized gains and losses are
used in the calculation.
Policy 2: Large- and mid-cap equity portfolios are revalued on the date when capital equal to 10
percent or more of current market value is contributed or withdrawn. Small-cap and fixed
income portfolios use a 5 percent threshold.
Policy 3: Cash and cash equivalents are excluded in total return calculations. Custody fees are not
considered direct transaction costs. Returns are calculated after deduction of trading
expenses.
Their conversation turns to the construction of composites and composite return calculations. Anton
tells Basco,
Long Pond calculates composite returns by asset-weighting the individual portfolio returns using
beginning-of-period values. For periods beginning 1 January 2010, we calculate composite
returns by asset weighting the individual portfolio returns quarterly. All actual, fee-paying,
discretionary portfolios are included in at least one composite. Non-fee-paying discretionary
portfolios are also included in a composite, and appropriate disclosures are provided. Client
portfolios that restrict the purchase of certain securities are excluded if this restriction hinders
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to
the portfolio manager’s ability to execute the investment strategy. We consider a hierarchical
structure of criteria for composite definition that promotes primary and secondary strategy
characteristics, such as asset classes, style, benchmarks, and risk/return characteristics. The
composites are not always defined according to each level of the hierarchy.
Anton then provides Basco a recent presentation to a prospective client for Long Pond’s mid-
capitalization composite. Details of this presentation are found in Exhibit 1.
Exhibit 1 – Mid-Capitalization Equity Composite
Benchmark: Russell Midcap Index
Column > 1 2 3 4 5 6 7
Total Assets ($m)
Net-of-
Gross-of-
Fees
Internal
Return
Benchmark
Dispersion
Number of
Composite Firm
(%)
Portfolios
Return (%)
Year
2007 4.4 3.4 3.6 5 3.1 125 1,000
2008 2.7 1.7 6.2 8 4.0 220 1,150
2009 –1.5 –2.5 –4.3 7 1.9 345 910
2010 8.3 7.3 11.1 11 2.6 430 1,020
1Q11 6.6 5.6 –2.9 13 4.1 600 1,100
Notes:
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