Standard III(D) – Performance Presentation

Standard III(D) – Performance Presentation obliges CFA members to make sure communication about investment performance is fair, accurate, and complete.

Compliance

Similar to Standard I(C) – Misrepresentation, Standard III(D) – Performance Presentation insists that information provided by investment professionals be representative of factual information and as complete as possible.  Standard III(D) – Performance Presentation, of course, is concerned primarily with duties to clients.

This standard prohibits inflation of yields for past investment, as well as projections for current recommendations.  The illusions of inflated performance by limiting discussion of risks are also barred.

To comply with Standard III(D) – Performance Presentation, a firm should consider the level of financial sophistication of its clients, making sure to include as much explanation as needed. It is also beneficial to include the performance of a composite of similar portfolios rather than a single account.  Finally, all disclosures related to tax, fees, and prior performance should be included in the presentation of recommendations.

Violation

It may be tempting for a fund manager to publicize exceptional earnings for a previous year.  However, to infer that similar performances can be expected, particularly when a fund’s performance is lower when averaged over a multi-year timeframe, would violate Standard III(D) – Performance Presentation. Should the fund manager guarantee a specific result, then Standard I(C) – Misrepresentation would also be in violation.

Question

Haruka Lin manages a fund for which 65% of the financial assets are held in 10 of the 120 stocks. The performance of that 65% of the fund outperformed the average index of similar indexes. Lin analyzes the year-over-year performance for those 10 major stocks and issues an email statement to current and prospective clients publicizing performance with an announcement that “current year results are likely to outperform popular index results.”  In how many ways has Lin violated Standard III(D) – Performance Presentation?

1. Lin did not perform a complete analysis of her fund.
2. The analysis of a single-year performance is limited.
3. Fund managers must not guarantee specific results based on past performance.

1. I & II, only
2. II & III, only
3. All of the above

Solution

The correct answer is C.

Haruka Lin has violated Standard III(D) – Performance Presentation in many ways.  First, Lin did not perform a complete analysis of her fund because although 65% of a fund composes a majority of holdings, 10 of 120 stocks result in incomplete information. Furthermore, an analysis of a single-year performance is limited in nature and therefore contributes to an incomplete analysis. Additionally, fund managers must not guarantee specific results based on past performance.