Views on improving the integrity of global capital markets
23 November 2018

Ethics in Practice: Presenting Investment Performance. Case and Analysis–Week of 19 November

CFA Institute Ethical Decision-Making Framework

Check the analysis of this week’s case (19 November) to see if you made the right choice.

Case

Jergens is the portfolio manager for the Volare Investment Management (VIM) fund, a registered collective investment scheme (CIS) organized under the laws of South Africa. VIM’s 2018 regulatory disclosure and marketing material for the fund, as produced by Jergens, presents annual investment performance data for the 2010-16 period that is accurate and calculated correctly. The performance history is that of a composite of separate accounts that followed the strategy used by the VIM fund prior to the assets being moved over to the CIS environment in 2017. In presenting the fund’s performance history, Jergens’ actions are

  1. appropriate because the investment performance is accurate.
  2. inappropriate because the investment performance is misleading.
  3. appropriate as long as the performance calculations are net of fees.
  4. inappropriate if Jergens was not the manager of the composite of segregated accounts from 2010.

Analysis

This case relates to CFA Institute Standard III(D): Performance Presentation, which states that CFA Institute members must make a reasonable effort to ensure that investment performance information is fair, accurate, and complete. Although the performance information presented by Jergens is calculated correctly and includes technically accurate data, Jergens’ failure to indicate clearly that the performance data applied to a period prior to registration of the VIM fund as a CIS had the potential to mislead investors into believing that the CIS fund had a long track record. To meet the “fair, accurate, and complete” requirement of the standard, Jergens should disclose that the 2010–16 performance history was that of a prior but similar entity and that the VIM fund, as a CIS, has been in existence only since 2017. Performance can be presented either net or gross of fees, as long as there is sufficient disclosure to inform investors about how the performance is calculated and what affect fees may have on the return figures. It is not inappropriate to present performance of a fund, account, or composite of accounts when the managers have changed, as long as the change of investment personnel during the period being presented is disclosed. Choice B is the best answer.

This case is based on an April 2018 Enforcement Action by the South African Financial Sector Conduct Authority.

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Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.


More About the Ethics in Practice Series

Just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. The Ethics in Practice series gives you an opportunity to “exercise” your ethical decision-making skills. Each week, we post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions. We then encourage you to assess the case using the CFA Institute Ethical Decision-Making Framework and through the lens of the CFA Institute Code of Ethics and Standards of Professional Conduct. Then join the conversation and let us know which of the choices you believe is the right one and explain why. Later in the week, we will post an analysis of the case and you can see how your response compares.


Image Credit: ©CFA Institute

About the Author(s)
Jon Stokes

Jon Stokes is the Director of Ethics and Standards Education at CFA Institute. His responsibilities include design and creation of on-line ethics education, development and maintenance of the CFA Institute Code of Ethics and Standards of Professional Conduct, and the design and management of the CFA Institute Ethical Decision-Making and Giving Voice to Values education programs. Stokes holds a JD degree.

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