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Arcadia Case ScenarioArcadia LLP is one of several independently operated investment management subsidiaries of Swiss Corp, a global bank. Arcadia is headquartered in Philadelphia and specializes in the management of equity, fixed income and real estate portfolios. Arcadia’s Chief Executive Officer recently hired Joan Westley, CFA as Chief Compliance Officer to achieve compliance with the Global Investment Performance Standards (GIPS). Arcadia just opened a division in Phoenix, incorporated as Arcadia West, LLP to accommodate one of its portfolio managers and his staff who manage a hedge fund. The staff in Phoenix works exclusively on the hedge fund’s strategy using an investment process distinct from the one used in the Philadelphia office.Westley makes the following statement at a meeting with the CEO, “I am establishing and implementing policies and procedures to ensure Arcadia is in compliance with GIPS. Although the hedge fund won’t be in compliance, it won’t impact our ability to be firm-wide compliant, because it is in an autonomous unit. We will be the first Swiss Corp subsidiary to be compliant. Keep in mind that even after implementation, we will not be able to claim compliance until our performance measurement policies, processes, and procedures are verified by an independent firm.”Westley begins her review of Arcadia’s current policies. She first reviews three policies regarding input data:Policy 1: The accounting systems record the cost and book values of all assets. Portfolio valuations are based on market values, provided by a third party pricing service.Policy 2: Transactions are reflected in the portfolio when the exchange of cash, securities, and paperwork involved in a transaction is completed.Policy 3: 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.Next, Westley reviews Arcadia’s policies for return calculation methodologies:Policy 4: Arcadia uses the Modified Dietz method to compute portfolio time-weighted rates of return on a monthly basis. Returns for longer measurement periods are computed by geometrically linking the monthly returns.Policy 5: Arcadia revalues portfolios when capital equal to 10 percent or more of current market value is contributed or withdrawn. Returns are calculated after deduction of trading expenses.Policy 6: Cash and cash equivalents are excluded in total return calculations. Custody fees are not considered direct transaction costs.Westley also looks at the investment policy statements (IPS) for the three sample portfolios that are included in Arcadia’s large capitalization equity composite:Portfolio A: A portfolio managed for a local church in which all fees are waived. The IPS prohibits holdings of companies involved in firearms, alcohol or tobacco. These securities represent 5% of the benchmark, but the portfolio manager feels he can nonetheless implement his strategy with these restrictions.Portfolio B: The equity carve-out portfolio of a balanced account. The client provides Arcadia discretion in the tactical asset allocation decision. Asset allocation amongst sub-portfolios is performed quarterly and each sub-portfolio holds tactical or frictional cash.Portfolio C: A large cap equity mutual fund managed for a corporate retirement plan. Employees can make contributions and withdrawals daily. The client requires the portfolio manager to maintain at least 15% of assets in cash balances to meet potential withdrawals.Finally, Westley examines a recent presentation to a prospective client regarding Arcadia’s small cap composite. Details of this presentation are found in Exhibit 1 and its notes.Exhibit 1Small Capitalization Equity CompositeBenchmark: Russell 2000 Notes:1. Arcadia is an investment firm affiliated with a major global bank and founded in April 2001. The firm manages portfolios in various equity, fixed income and real estate strategies.2. Arcadia has a number of affiliates owned by the parent company; a schedule is provided separately.3. The composite has an inception date of 12/31/2003. A complete list and description of firm composites is available upon request.4. The composite includes all fee-paying discretionary, nontaxable portfolios that follow a small cap strategy. The composite does not include any non-fee paying portfolios.5. 1Q09 data is not annualized.6. Valuations are computed and performance reported in US$.7. Internal dispersion is calculated using the equal weighted standard deviation of all portfolios that were included in the composite for the entire year.8. Gross-of-fees performance returns are presented before management and custodial fees but after all trading expenses. The management fee schedule is as follows: 1.00% on first US$25M; 0.60% thereafter. Net-of-fees performance returns are calculated by deducting the management fee of 0.25% from the quarterly gross composite return. |
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