Standard III(D) – Performance Presentation

When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.Guidance

Members and Candidates must not misrepresent or mislead investors about their performance record – past or present. Members and Candidates should present a fair and accurate presentation of their performance information. In the case of a brief presentation, Members or Candidates should make available detailed information supporting their presentation on request.

Compliance Recommendations

Apply the Global Performance Investment Standards (GIPS)

Compliance with the GIPS standards will ensure that Members and Candidates meet the requirements under Standard III(D) – Performance Presentation. Members and Candidates should encourage their firms to adopt and comply with the GIPS standards.

Compliance without adopting GIPS

 Members and Candidates can meet the requirements under Standard III(D) by:

• Considering the knowledge and sophistication of the audience to whom the presentation is directed.
• Presenting the performance of a weighted composite rather than a single account.
• Including terminated accounts in their performance history and include the dates of termination.
• Include disclosures that help explain the performance information given.

Application 1: Performance Presentation and Former Employer

Tina Jensen is a well-respected global macro fund manager. Icon Partners is impressed by Jensen’s performance; she has managed to consistently outperform her peers in the global macro strategy space. Icon Partners successfully poaches her from her previous employer and sends out marketing material created by Jensen, stating her performance history as well as uploading her performance information on the company’s website. In her biography for the company website, she discloses that her performance history occurred at her previous firm. Still, she fails to disclose the years in which she underperformed the stated benchmark.

Has Jensen violated Standard III(D) – Performance Presentation?

       A. No, because she does not need to disclose her years of underperformance.

       B. No, because she disclosed that her performance history occurred at her previous employer.

       C. Yes, because she is selective about what results to disclose.

Solution

The correct answer is C.

Jensen is required to give a fair and complete representation of her performance history. As a result, Jensen has violated Standard III(D) – Performance Presentation. Stating that her performance was achieved at her previous firm is a required disclosure. Her omissions of her years of her underperformance conflicts with Standard III(D) – Performance Presentation.

Application 2: Performance Presentation and Simulated Results

Andrew Mason is a quantitative research analyst at QuantFirst. He has been developing a stock screening algorithm that identifies stocks that exhibit long-term momentum. In his research, he finds that his algorithm is successful in selecting stock found in the S&P 500 with the desired qualities between 2010-2020. His manager is satisfied that the algorithm works. While preparing the marketing material of this new algorithm, he is careful to disclose that the results are simulated from historic data (2010-2020) and that the future success of the algorithm cannot be guaranteed. However, he fails to disclose that the simulation only yielded successful results for the S&P 500.

Do any of Mason’s actions violate Standard III(D) – Performance Presentation?

     A. No, because he informs potential clients that the future success of the algorithm cannot be guaranteed.

     B. Yes, because the success of his algorithm is time-dependent. He is selective about the period chosen.

     C. Yes, because he omits that the algorithm has only produced successful results for stocks found in the S&P 500.

Solution

The correct answer is C.

Mason has violated Standard III(D) – Performance Presentation by failing to accurately and fairly disclose the circumstances in which the algorithm produced successful results. The use of historical data and the time-period selected is permitted provided that he makes complete disclosures.

Application 3: GIPS Compliance

Sasha Harrison is working on a performance report on the returns of InvestorCore’s money market mutual fund. In her report, she states that the firm claims compliance with the GIPS standards. However, her return calculations differ from the appropriate return methodologies presented in the GIPS standards. She disseminates the report to all clients of the fund.

Has there been a violation of Standard III(D) – Performance Presentation?

     A. No, the firm is allowed to claim ‘partial’ GIPS compliance even with a different return calculation.

     B. No, because her performance presentation does not misuse or omit data.

     C. Yes, the difference in methodology would invalidate the firm’s claim of GIPS compliance.

Solution

The correct answer is C.

Harrison has violated Standard III(D) – Performance Presentation. When claiming GIPS compliance, firms must meet all the requirements and disclosures that are relevant to the firm. There is no ‘partial’ claim of compliance; a firm must either meet the requirements or present reports that do not claim compliance.

Application 4: Performance Calculation

June Prentice, of Knight Securities, has created a promotional brochure that is shared with the firm’s potential clients. In the brochure, Prentice states that “the average growth rate in the value of assets across Knight’s investment funds is 12% over the year.” Only one fund has an average growth rate of 12% over the year. The fund has never had an average rate of growth of 12% across all its investment funds. She ends the brochure with “with Knight Securities you have a 12% guaranteed return!.”

How has Prentice violated Standard III(D) – Performance Presentation?

     A. She has not violated Standard III(D) – Performance Presentation.

     B. She does not take into account all of Knight’s investment funds. She should average the returns across all the investment funds.

     C. By making the statement “with Knight Securities you have a 12% guaranteed return!”.

Solution

The correct answer is B.

Prentice has violated Standard III(D) – Performance Presentation by failing to average returns across all of Knight Securities investment funds. Her statement guaranteeing a 12% return is not a violation of Standard III(D) – Performance Presentation but rather a violation of Standard I(C) – Misrepresentation.

Reading 46: Guidance for The Standards of Professional Conduct (I-VII)

LOS 46 (a) Demonstrate a thorough knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situation.