C. In order to ensure that the performance results presented accurately reflect the actual results achieved by a particular investment firm or product, the consultant should obtain information from the investment manager to support the performance composite calculations. Requested information could include the aggregate market values and cash flows of the performance composite, the returns for individual portfolios in the performance composites, or the underlying individual portfolio performance accounting data.
II. COMPOSITE CONSTRUCTION
A. Investment management consultants should use composites from firms that are in compliance with GIPS. If a consultant chooses to use a firm that is not in compliance with CFA Institute standards, the noncompliance must be disclosed to the client. The individual composites presented should also be prepared in compliance with GIPS, and noncompliance should be disclosed. For noncompliant firms and composites, the reasons for noncompliance should be disclosed to the client. Supplemental information should not be presented on a stand-alone basis.
B. Consultants, at a minimum, should use quarterly rate-of-return data in calculations. Monthly rate-of-return data are preferable.
C. Consultants are encouraged to obtain additional quantitative information about the performance composite – for example, equal-weighted results, the median, range, standard deviation, and other information necessary to effectively assess that a composite is representative of the investment product. This additional information includes required GIPS disclosures.
D. Model (simulated) portfolio: The consultant may present model portfolio results to a client as supplemental information, subject to the following constraints:
1. The consultant should provide the client with full disclosure concerning the methodology used and assumptions made. A statement that no assets were actually managed using the model must be included.
2. Model portfolio results should not be linked with actual results.
3. The investment manager should be encouraged to continue to calculate model portfolio results after actual implementation of the investment product to facilitate analysis and comparison by the consultant.
E. Hypothetical portfolio: The consultant may use hypothetical portfolio results to analyze an investment product and process, subject to the following constraints:
1. The consultant should provide the client with full disclosure concerning the weighting methodology used and assumptions made.
2. The firm must be in compliance with GIPS and the underlying composites used to construct the hypothetical portfolio must be constructed according to GIPS.
3. Disclosures for all underlying composites should be presented in accordance with the IMCA Performance Reporting Guidelines.
4. An example of a hypothetical portfolio is a balanced composite that combines stock and bond composites because the manager may not have managed balanced accounts in the past.
F. Transferability of historical record:
1. Past investment results belong to the investment firm (as defined by CFA Institute) that achieved those results, not to any single individual(s), and should not be altered to reflect personnel or other organizational changes. The consultant should disclose any significant changes in the personnel or organizational structure of the investment management firm that, in the consultant's opinion, might affect future performance.
2. Performance results achieved by key investment personnel while employed with another investment firm may be used by the new firm if the consultant determines that these professionals are implementing the same investment process with similar resources and disciplines at the new firm. The prior historical record may be linked with results achieved at the new firm to provide a long-term investment record. Disclosure of these circumstances to the client is mandatory, as is any SEC ruling on the ownership of the track record.
G. Special cases
In the absence of IMCA Guidelines or CFA Institute standards for an investment product, the manager and/or consultant should prepare performance results in accordance with appropriate, recognized industry standards such as the American Institute of Certified Public Accountants Standards. The goal should always be to have an accurate representation of the product's performance.
H. Additional information
The consultant should review the following information for each performance composite being presented (from the inception of the firm, the inception date of the investment product, or 10 years – whichever is shorter).
1. CFA Institute disclosure(s)
2. The total number and market value of portfolios included in the performance composite
3. The total number and market value of discretionary portfolios managed in a similar manner but not included in the composite
4. The total number and market value of nondiscretionary portfolios managed in a similar manner but not included in the composite
5. The average, median, smallest, and largest portfolios in the performance composite
6. The average asset allocation of the performance composite
7. An explanation of the criteria by which portfolios are excluded, deleted, or added to the performance composite
8. The standard deviation of individual portfolio returns included in the performance composite return
9. The range of returns (and the median return) within the performance composite
10. Quarterly, annual, and cumulative returns as well as the risk associated with the composite returns
I. The IMCA Performance Reporting Guidelines encourage investment management firms to obtain third-party verification that a performance composite is in compliance with GIPS.
III. DISCLOSURE AND PRESENTATION OF COMPOSITE RESULTS TO CLIENTS
A. Sources of data and definitions relating to these data should be disclosed.
B. Whenever investment results containing leverage are presented to a client, the details regarding the leverage should be disclosed.
C. For comparative purposes, the consultant should present the performance composite on both a gross basis (before deduction of the investment management fee) and a net basis (after deduction of the investment management fee). If only gross return information is presented to the client, additional information should be provided to enable the client to determine the impact of the manager's fee. The consultant must be consistent when using gross or net data. The manager's fee must also be presented.
D. The consultant should use “best efforts” to ensure that any rate-of-return comparisons are reasonable and appropriate.
E. The consultant should present annual and cumulative returns for each performance composite to clients in a format that facilitates the objective comparison of one manager with another. At a minimum, each year and each longest common time period should be included in the report. Returns for client-requested time periods, market cycles, or other time periods should be presented when needed. At a minimum, the returns for each composite should be presented from the inception of the firm, the inception of the investment product, or 10 years – whichever is shorter.
F. Rates of return for periods longer than one year should be presented in annualized form. Returns for periods shorter than one year should never be annualized.
G. Statistical measures of risk
1. In addition to rates of return, measures of risk should be presented to give the client a more complete picture of the investment manager's results. The consultant should determine the number of observations that are sufficient for risk calculations.
2. At a minimum, portfolio risk should be measured by calculation of an annualized standard deviation derived from monthly or quarterly total rates of return for a meaningful reporting period (as determined by the consultant).
3. Measures