Introduction to CFA Institute

Jonathan A. Boersma, CFA

Head, Professional Standards
CFA Institute is the global association of investment
professionals that sets the standard for professional
excellence. We are a champion for ethical behavior in
investment markets and a respected source of knowledge in
the global financial community.

Our mission is to lead the investment profession globally by

promoting the highest standards of ethics, education, and
professional excellence for the ultimate benefit of society.

2
ETHICS, EDUCATION, AND PROFESSIONAL
EXCELLENCE

• CFA® Program

• CIPM® Program

• Claritas® Investment Certificate

• Code of Ethics and Standards of Practice

• Asset Manager Code of Professional Conduct

• Global Investment Performance Standards (GIPS®)

• Capital Markets and Financial Reporting Policy

3
CFA INSTITUTE
- 117,750+ members in 146 countries
- 139 societies in 60 countries

4
CFA INSTITUTE PROGRAMS
Claritas® Investment CIPM® Program CFA® Program
Certificate

All professional Investment performance Investment decision-

disciplines working in and risk evaluation; risk making and strategy;
financial services. management; financial portfolio and wealth
planning; manager management;
search and selection; institutional investing;
investment analysis; and and investment analysis.
client relations.

One exam Two exams Three exams

No experience required Two years professional Four years professional
experience experience

See program details at http://www.cfainstitute.org/programs

5
THE CFA CHARTER

6
THE CFA CHARTER

- Graduate-level investment credential

- Held by more than 100,000 investment professionals
working in more than 130 countries
- Recognized by regulatory bodies in many countries as a
proxy for meeting certain licensing requirements
- More than 180 universities around the world incorporate
the CFA curriculum into their degree programs
THE CFA EQUATION
Steps to earning the charter
EMPLOYERS SEEK OUT
THE CFA CHARTER
“Enrollment in or completion of a CFA designation
[program] would be an asset”
-Investment Banking Analyst, Goldman Sachs, 2010

“You have, or are in the final year of [earning], your CFA

designation”
-Equity Research Associate, Bank of America Merrill Lynch, 2010

“Completed [the CFA Program] or working towards CFA

designation is advantageous”
- Analyst, BlackRock, 2010
* Listings from CFA Institute JobLine

11
TOP GLOBAL EMPLOYERS OF
CHARTERHOLDERS

*As of September 2012

WHAT CAN I DO WITH
THE CFA CHARTER?
Charterholder employment by sector

*As of September 2012.

WHAT CAN I DO WITH
THE CFA CHARTER?
Charterholder employment by title

*As of September 2012

15
GROWING DEMAND FOR
THE CFA CHARTER
Candidate exam registration

250,000

200,000

150,000

100,000

50,000

0
1996 1998 2000 2002 2004 2006 2008 2010 2012
CFA INSTITUTE MEMBERS BY REGION
CFA PROGRAM CANDIDATES BY REGION
WHAT YOU LEARN AS A
CFA CHARTERHOLDER
• Investment (equity and fixed income) analysis
• Portfolio management
• Wealth planning
• Economic theory
• Alternatives and derivatives
• Performance measurement & evaluation
• Risk management
• Financial reporting
• Quantitative methods
• Ethics

20
THE THREE LEVELS OF THE CFA EXAM

21
HOW LONG IS THIS GOING TO TAKE?
• Level I:
 18 Study Sessions totaling 3,200 pages, with
• 63 readings
• And end-of-chapter problems
 One or more practice exams
 Over 500 Learning Outcome Statements
 Six-hour exam

• Successful candidates report dedicating in excess of

300 hours of study per level
• The entire CFA Program can be accomplished in as
few as two years, but it takes most candidates
between two and five years
EXAMINATIONS
Level Format Number of Questions
I Multiple Choice 240 Questions (120 in AM and 120
in PM)
1 question = 1 ½ minutes
II Item Sets 20 Item Sets (10 in AM and 10 in
PM); each item set has 6
questions for a total of 120
questions, 3 minutes each
III AM – Essay 8-12 cases, multiple parts,
variable minutes
PM – Item Sets 10 Item Sets; 60 questions,
3 minutes each

23
JUNE 2013 EXAM RESULTS
• 146,605 registered candidates from 168 countries;
118,142 sat for the exam

• 268 exam sites worldwide in 196 cities/91 countries

Range of Recent Pass Rates (2009-2013)

Level I 34-46%
Level II 39-43%
Level III 46-52%

24
CFA® PROGRAM COSTS

June 2014 Fees (USD)

Registration Fee to Enter CFA® Program
(one time) $440

Enrollment Fee for each Examination $620*

Total cost for entire 3 Levels <$2,500

*Includes complete eBook curriculum and supplemental study

tools. There is a separate cost for printed curriculum.

Assumes Registration and Enrollment received by earliest

deadline.

25 32
WITH THE CFA CHARTER, YOU …
• Develop a comprehensive investment perspective
• Gain fluency in practical investment analysis and
management skills
• Earn credibility with industry peers
• Become part of a global community of top industry
professionals
• Gain the flexibility to work in any market
• Are sought out by top industry employers
• Demonstrate a commitment to ethics and professional
standards
CLARITAS INVESTMENT
CERTIFICATE

28
CLARITAS INVESTMENT CERTIFICATE

A clear understanding of the investment

industry and the professional
responsibilities within it.

Shared Improving Standing Building

Understanding Performance Out confidence

29
THE CLARITAS CURRICULUM
Module 1: Overview (5%)
Chpt. 1. The Investment Industry: A Top-Down View
Module 2: Ethics and Regulation
(10%)
Chpt. 2. Ethics and Investment Professionalism
Chpt. 3. Regulation and Supervision
Module 3: Tools and Inputs (20%)
Chpt. 4. Financial Statements
Chpt. 5. Quantitative Concepts
Chpt. 6. Microeconomics
Chpt. 7. Macroeconomics
Chpt. 8. International trade and Foreign Exchange
Module 4: Investment Instruments
(20%)
Chpt. 9. Equities Securities
Chpt. 10. Debt Securities
Chpt. 11. Derivatives
Chpt. 12. Alternate Investments
Module 5: Industry Structure (20%)
Chpt. 13. Structure of the Investment Industry
Chpt. 14. Investment Vehicles and Structures
Chpt. 15. Investment Market Characteristics
Module 6: Industry Controls (20%)
Chpt. 16. Investment Industry Documentation
Chpt. 17. Risk Management
Chpt. 18. Performance Evaluation
Module 7: Serving Clients Needs (5%)
Chpt. 19. Investor Needs and Investment Policy
Chpt. 20. Asset Allocation
Chpt. 21. Active and Passive Investment Management
The approximate weighting of the topics covered in the
exam is detailed in brackets.
30
WHAT DOES IT INVOLVE?
The Claritas Investment Certificate is an easy-to-use, online, self-study program
including reading materials and the exam.

It will involve:
• Approximately 100 hours of self-study from an interactive e-book (print-on-
demand also available, for an additional charge)
• Access to supplemental study tools including end-of-chapter questions, an
online mock exam, and additional practice assessments
• Two-hour, multiple-choice examination under high-stakes test conditions
• Computer-based testing within global network of centers managed by
Pearson VUE
• Award of a certificate of knowledge for those who pass the exam
• No membership or continuing education requirement

31
THE CIPM PROGRAM

32
THE CIPM PROGRAM
DRIVE SMARTER
MORE INFORMED DECISION-MAKING
TO OPTIMIZE INVESTOR RESULTS

Learn more about the

CIPM program at:
www.cfainstitute.org/cipm

33
THE CIPM PROGRAM OVERVIEW
Two Levels:
Principles Level – emphasizes the conceptual foundations of performance
measurement, attribution, and appraisal.
Expert Level – emphasizes performance evaluation and presentation,
including application of the appropriate tools and inputs in more complex
situations and the GIPS Standards.

Computer-based exams
- Administered by Pearson VUE with 400 local test centers in 80 countries
- Principles exam consists of 100 multiple choice questions
- Expert exam consists of 20 item sets (scenarios followed by four multiple choice questions)

Work Experience Requirements

To qualify for membership in the CIPM Association, you must have accrued either:
 Two years of professional experience in performance-related activities. OR
 Four years of professional experience in the investment industry

20 March 2014 34 34
INVESTMENT PROCESS
CFA VS. CIPM PROGRAM

ram
ro g
CF AP

En
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Portf valuation
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o gram
IPM Pr
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35
PORTFOLIO EVALUATION IS:

 Performance and Risk Measurement

What was the portfolio’s performance?

 Performance and Risk Attribution

Why did the portfolio produce the observed performance?

 Performance and Risk Appraisal

Is the manager’s performance due to skill or luck?

 Manager Evaluation/Search and Selection

Evaluating performance in order to select managers.

36
 QUESTIONS?

For more information visit:

www.cfainstitute.org/programs

37
PERFORMANCE MEASUREMENT AND
REPORTING
MEASURING RETURN

MVt  MV0
rt 
MV0

• At the beginning of 2011, a portfolio has a market value of $1 million. At the

end of March 2011, the portfolio’s market value is $1,300,000. If there are no
interim cash flows, then the portfolio experienced a 30 percent return during
the quarter.

$1,300,000  $1,000,000
rt   30.0%
$1,000,000

39
THE EFFECT OF CASH FLOWS
HOW WOULD YOU CALCULATE THE RETURN?
1 Jan 1 May 1 Sep 31 Dec
Market Value*
* Market $1,000,000
Value after deposit or withdrawal $1,300,000
Cash Flow $200,000

Method 1 Method 2
- Assumes cash flow occurs - Assumes cash flow occurs
at the end of the period at the beginning of the
period
($1,300, 000  $200, 000)  $1, 000, 000 $1,300, 000  ($1, 000, 000  $200, 000)
rt  rt 
$1, 000, 000 $1, 000, 000  $200, 000
 10.0%  8.3%
RETURN APPROXIMATION WITH EXTERNAL
CASH FLOWS
• Beginning of Period MVt  MV0  CF
rt 
- Full adjustment to denominator MV0  CF

MVt  MV0  CF
• End of Period rt 
MV0
- No adjustment to denominator
MVt  MV0  CF
• Dietz Method rt 
1
- Partial adjustment to denominator MV0  CF
2

• Modified Dietz Method MVt  MV0  CF

rt  N
- Time-weighted adjustment to denominator MV0   wi CFi
i 1

 All these methods assume that returns accrue to the portfolio evenly throughout
the period.

41
DIFFERENT METHODS
• Beginning of Period $1,300, 000  $1, 000, 000  $200, 000
rt   8.3%
$1, 000, 000  $200, 000

$1,300, 000  $1, 000, 000  $200, 000

• End of Period rt   10.0%
$1, 000, 000

$1,300, 000  $1, 000, 000  $200, 000

• Dietz Method rt   9.1%
1
$1, 000, 000    $200, 000
2
$1,300, 000  $1, 000, 000  $200, 000
• Modified Dietz Method rt   8.8%
2
$1, 000, 000    $200, 000
3

 All these methods assume that returns accrue to the portfolio evenly throughout
the period.
TIME-WEIGHTED RETURN (TWR)
REMOVES THE IMPACT OF CASH FLOWS AND
ALLOWS RETURNS TO ACCRUE UNEVENLY

• Calculate Sub-Period Returns

rJan 
 $1,100,000  $200,000   $1,000,000
 10.00%
$1,000,000

rFeb, Mar 
 $1,300,000  0   $1,100,000
 18.18%
$1,100,000

• “Chain-Link” Sub-Period Returns

(1 + rJan)(1 + rFeb,Mar) – 1 = (1 – 0.10)(1 + 0.1818) – 1 = 6.36%

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TIME-WEIGHTED VS. MONEY
WEIGHTED RETURNS
 TIME-WEIGHTED RETURNS VS.
MONEY-WEIGHTED RETURNS
Portfolio 1
Initial Investment = 1,000
Month 1 return = 100%
Ending portfolio value = 2,000
Portfolio 2
Initial Investment = 1,000
Month 1 return = 100%
Ending portfolio value = 2,000

Client cash flow = +1,000 Client cash flow = -1,000

Month 2 return = -50%
Ending portfolio value = 1,500
-----------------------------------------
Time-weighted return = 0%
Internal rate of return = -18%
Month 2 return = -50%
Ending portfolio value = 500
------------------------------------------
Time-weighted return = 0%
Internal rate of return = 37%

IRR is dependent on the timing of the cash flows → client specific!

IRR is not comparable unless cash flows are identical.

45
VOLATILITY AND CASH FLOWS EXACERBATE THE
DIFFERENCE BETWEEN TWR AND IRR

• No Volatility and Significant • Volatility and Significant Cash

Cash Flow Flow
Period 0 1 2 Period 0 1 2
Return 20% 20% Return 20% -20%
Cash Flow (end-of-period) -50 Cash Flow (end-of-period) -50
Portfolio 100 70 84 Portfolio 100 70 56

Portfolio Return Portfolio Return

TWR 44.0% TWR -4.0%
IRR 20.0% IRR 3.9%
TWR VS. MWR EXAMPLE
PERFORMANCE MEASUREMENT
WHAT WAS MARY’S PERFORMANCE IN QUARTER 1?

𝑀𝑉𝐸𝑛𝑑 − 𝑀𝑉𝐵𝑒𝑔
𝑟𝑡1 =
𝑀𝑉𝐵𝑒𝑔

Suppose at the beginning of the year, Mary’s portfolio has a

market value of $100,000. At the end of the first quarter, the
portfolio’s market value is $150,000. The portfolio earned
an impressive 50% for the quarter.

$150,000 − $100,000
𝑟𝑡1 = = 50%
$100,000

48
PERFORMANCE MEASUREMENT
WHAT WAS MARY’S PERFORMANCE IN QUARTER 2?

𝑀𝑉𝐸𝑛𝑑 − 𝑀𝑉𝐵𝑒𝑔
𝑟𝑡2 =
𝑀𝑉𝐵𝑒𝑔

After ending quarter 1 with $150,000, Mary decides to

deposit $900,000. The total amount invested is $1,000,000
($100,000 & $900,000). At the end of the second quarter,
her portfolio’s market value dropped to $525,000. The
portfolio lost a staggering 50% during the second quarter.
$525,000 − $1,050,000
𝑟𝑡2 = = −50%
$1,050,000
49
MARY’S PORTFOLIO
QUARTER 1: GAINED 50%, QUARTER 2: LOST 50%
Mary's Portfolio
$1,200,000
$1,100,000 $1,050,000
$1,000,000
$900,000
$800,000
$700,000 -50%
$600,000
$500,000 Deposit
$900,000 $525,000
$400,000
$300,000
+50%
$200,000
$100,000
$100,000 $150,000
$-
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10

50
MARY’S TIME-WEIGHTED RETURN (TWR)
REMOVES THE IMPACT OF CASH FLOWS AND ALLOWS
RETURNS TO ACCRUE UNEVENLY

Calculate Sub-Period Returns

𝑀𝑉𝐸𝑛𝑑 − 𝑀𝑉𝐵𝑒𝑔 $150,000 − $100,000
𝑟𝑡1 = 𝑟𝑡1 = = 50%
𝑀𝑉𝐵𝑒𝑔 $100,000

𝑀𝑉𝐸𝑛𝑑 − 𝑀𝑉𝐵𝑒𝑔 $525,000 − $1,050,000

𝑟𝑡2 = 𝑟𝑡2 = = −50%
𝑀𝑉𝐵𝑒𝑔 $1,050,000

“Chain-Link” Sub-Period Returns

1 + 0.5 × 1 + −0.5 − 1 = −25%

51
MARY’S INTERNAL RATE OF RETURN (IRR)
MEASURES ACTUAL RETURN EXPERIENCED BY INVESTOR

Mary’s January 2010 April 2010 July 2010

Portfolio t=0 t=1 t=2
Cash Flows -$100,000 -$900,000 $525,000

Solve for average growth rate that equates net present

value of all cash flows equal to zero:
$900,000 $525,000
−$100,000 − 1
+ 2
= 0;
1−𝑟 1+𝑟
𝑟𝑖𝑟𝑟 = −45.02%
IRR is also known as the Money-Weighted Return (MWR)

52
PERFORMANCE MEASUREMENT
WHAT WAS PAUL’S PERFORMANCE IN QUARTER 1?

𝑀𝑉𝐸𝑛𝑑 − 𝑀𝑉𝐵𝑒𝑔
𝑟𝑡1 =
𝑀𝑉𝐵𝑒𝑔

At the beginning of the year, Paul’s portfolio has a

market value of $900,000. At the end of the first
quarter, the portfolio’s market value is $1,350,000.
The portfolio earned an impressive 50% for the
quarter.
$1,350,000 − $900,000
𝑟𝑡1 = = 50%
$900,000
53
PERFORMANCE MEASUREMENT
WHAT WAS PAUL’S PERFORMANCE IN QUARTER 2?

𝑀𝑉𝐸𝑛𝑑 − 𝑀𝑉𝐵𝑒𝑔
𝑟𝑡2 =
𝑀𝑉𝐵𝑒𝑔

After ending quarter 1, with $1,350,000, Paul decides to

deposit $100,000. The total amount invested is $1,000,000
($900,000 & $100,000). At the end of the second quarter,
the portfolio’s market value is $725,000. The portfolio lost a
staggering 50% during the second quarter.
$725,000 − $1,450,000
𝑟𝑡2 = = −50%
$1,450,000

54
PAUL’S PORTFOLIO
QUARTER 1: GAINED 50%, QUARTER 2: LOST 50%
Paul's Portfolio
$1,600,000 Deposit
$1,350,000 $1,450,000
$1,500,000
$1,400,000
$1,300,000
$1,200,000 -50%
$1,100,000
$1,000,000 +50%
$900,000
$900,000
$800,000
$700,000
$725,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$-
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10

55
PAUL’S TIME-WEIGHTED RETURN (TWR)
REMOVES THE IMPACT OF CASH FLOWS AND ALLOWS
RETURNS TO ACCRUE UNEVENLY

Calculate Sub-Period Returns

𝑀𝑉𝐸𝑛𝑑 − 𝑀𝑉𝐵𝑒𝑔 $150,000 − $100,000
𝑟𝑡1 = 𝑟𝑡1 = = 50%
𝑀𝑉𝐵𝑒𝑔 $100,000

𝑀𝑉𝐸𝑛𝑑 − 𝑀𝑉𝐵𝑒𝑔 $525,000 − $1,050,000

𝑟𝑡2 = 𝑟𝑡2 = = −50%
𝑀𝑉𝐵𝑒𝑔 $1,050,000

“Chain-Link” Sub-Period Returns

1 + 0.5 × 1 + −0.5 − 1 = −25%

56
PAUL’S INTERNAL RATE OF RETURN (IRR)
MEASURES ACTUAL RETURN EXPERIENCED BY INVESTOR

Paul’s January 2010 April 2010 July 2010

Portfolio t=0 t=1 t=2
Cash Flows -$900,000 -$100,000 $725,000

Solve for average growth rate that equates net present

value of all cash flows equal to zero:

$100,000 $725,000
−$900,000 − 1
+ 2
= 0;
1−𝑟 1+𝑟

𝑟𝑖𝑟𝑟 = −15.63%

57
MARY AND PAUL BOTH INVESTED $1,000,000 WITH
THE SAME MANAGER. WHY DOES IRR DIFFER?
Year 1 Year 2 TWR IRR
(MWR)
Mary’s Portfolio +50% -50% -25.0% -45.02%
$100,000 +$900,000
Paul’s Portfolio +50% -50% -25.0% -15.63%
$900,000 +$100,000

58
TIMING IS EVERYTHING
Paul's Portfolio Mary's Portfolio
$1,600,000 Deposit
$100,000 $1,450,000
$1,500,000 TWR IRR
$1,400,000 Paul -25.0% -15.63%
$1,300,000
+50% $1,350,000
$1,200,000 -50%
$1,100,000 $1,050,000
$1,000,000
$900,000
$800,000
$700,000 Deposit $725,000
-50%
$600,000 $900,000
$500,000
$525,000
$400,000
$300,000 TWR IRR
+50%
$200,000 Mary -25.0% -45.02%
$100,000 $150,000
$-
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10

59
DIFFERENT RETURN METHODOLOGIES
• Time-Weighted Return
- Measures the return of a single dollar invested at the beginning of the period
- Removes the impact of external cash flows
- Both Mary’s and Paul’s TWR = -25.0%

• Money-Weighted Return (IRR)

- Measures the return of the average amount of money in the portfolio
- Affected by external cash flows
- Mary’s MWR = -42.02%; Paul’s MWR= -15.63%

• Time-Weighted Return is More Appropriate for Evaluating Manager

• Differences are Large When:
- Large external cash flows TWR IRR
- Volatile returns
Mary -25.0% -45.02%
Paul -25.0% -15.63%

60
INTRODUCTION TO THE GLOBAL
INVESTMENT PERFORMANCE STANDARDS
WHAT ARE THE GLOBAL INVESTMENT
PERFORMANCE STANDARDS?

The Global Investment Performance Standards (GIPS®) are voluntary

standards governing the calculation and presentation of investment
performance based on the ethical principles of fair representation and full
disclosure.

The goal of the GIPS Executive Committee is to have all firms adopt the
GIPS standards as the standard for investment firms to present historical
investment performance information.
WHY WERE PERFORMANCE STANDARDS
NECESSARY?
• Lack of reporting consistency
- Back testing
- Portable performance
- Model portfolios
- Survivorship
- Representative portfolio
• Lack of industry-wide comparability
• Lack of regulatory guidance
- Self-regulation of the industry
 EVALUATING PERFORMANCE
Is this a good asset manager ?

160

140

120

100

80

60

40

Asset Manager Benchmark

 EVALUATING PERFORMANCE
Who is the better
asset manager ?

Manager A Manager B

10 yr return 5% 5%
Std Dev 10 % 43 %
EVALUATING PERFORMANCE

160

140

120

100

80

60

40

Asset Manager (Total) Benchmark (Price)

EVALUATING PERFORMANCE
10.00%

8.00%

6.00%

4.00%

2.00%

0.00%

-2.00%

-4.00%
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

Benchmark Asset Manager

EVALUATING PERFORMANCE
9.00%

8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%

-1.00%

-2.00%

-3.00%

-4.00%

-5.00%
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

Manager A Benchmark Composite

WHO BENEFITS FROM THE GIPS STANDARDS?
• Investors
- Plan sponsors
- High-net-worth investors
- Retail investors
• Investment Managers
- Including equity, fixed income, hedge fund, private equity, and real estate
investment management firms
• Intermediaries
- Consultants
BENEFIT TO INVESTMENT MANAGERS
• Firms recognized for adherence to industry best practice

• Strengthened internal processes and controls; improved

risk management

• Introduces transparency to the performance presentation and generates an

improved view of the track record

• Market has determined that it wishes to embrace the GIPS standards

BENEFIT TO INVESTORS
• Enhanced ability to compare performance between firms
and strategies

• Consistency in calculation and presentation of performance results, such

as frequency of valuation, treatment of large cash flows, and handling of
accruals

• Full disclosure of important details on performance data presented, such

as fees, composite construction criteria, dispersion of returns, etc.
BENEFITS OF POLICIES AND PROCEDURES
• Comprehensive and detailed Policy & Procedures (P&P) as
required by the GIPS standards:
- Eliminates the ‘gray areas’: speeds up process, no discussion,
ensures consistency
- Input data and Calculation methodology are part of P&P: Policies
for Valuation, Pricing, Technology, Market Data
- Update but retain previous details as they describe the past
- Institutional memory; document exceptions and one-off solutions;
maintain ‘daily’
- Best training manual
- P&P requested and used by regulators, internal audit,
risk management
KEY TERMINOLOGY
• “Firm”: The entity that claims compliance with the GIPS
standards; defines the universe of managed
portfolios
• Composite: An aggregation of portfolios managed to the same strategy;
can be a single portfolio
• Compliant
Presentation: Performance report containing required and/or
recommended quantitative and qualitative disclosures
WHAT IS A GIPS REPORT?
Sample 1 Investment Firm
Balanced Growth Composite
1 January 2002 through 31 December 2011
Composite Composite Custom
Gross Net Benchmark Composite Benchmark Internal Composite Firm
Return Return Return 3-Yr St Dev 3-Yr St Dev Number of Dispersion Assets Assets
Year (%) (%) (%) (%) (%) Portfolios (%) ($ M) ($ M)
2002 –10.5 –11.4 –11.8 31 4.5 165 236
2003 16.3 15.1 13.2 34 2.0 235 346
2004 7.5 6.4 8.9 38 5.7 344 529
2005 1.8 0.8 0.3 45 2.8 445 695
2006 11.2 10.1 12.2 48 3.1 520 839
2007 6.1 5.0 7.1 49 2.8 505 1,014
2008 –21.3 –22.1 –24.9 44 2.9 475 964
2009 16.5 15.3 14.7 47 3.1 493 983
2010 10.6 9.5 13.0 51 3.5 549 1,114
2011 2.7 1.7 0.4 7.1 7.4 54 2.5 575 1,236
Sample 1 Investment Firm claims compliance with the Global Investment Performance Standards (GIPS®) and has
prepared and presented this report in compliance with the GIPS standards. Sample 1 Investment Firm has been
independently verified for the periods 1 January 2000 through 31 December 2010. The verification report is available
upon request. Verification assesses whether (1) the firm has complied with all the composite construction
requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to
calculate and present performance in compliance with the GIPS standards. Verification does not ensure the
accuracy of any specific composite presentation.
continued…
WHAT IS A GIPS REPORT? (CONTINUED)
Notes:
Sample 1 Investment Firm is a balanced portfolio investment manager that invests solely in U.S.-
based securities.

Sample 1 Investment Firm is defined as an independent investment management firm that is not
affiliated with any parent organization. Policies for valuing portfolios, calculating performance, and
preparing compliant presentations are available upon request.

The Balanced Growth Composite includes all institutional balanced portfolios that invest in large-cap
U.S. equities and investment-grade bonds with the goal of providing long-term capital growth and
steady income from a well-diversified strategy. Although the strategy allows for equity exposure
ranging between 50–70%, the typical allocation is between 55–65%. The account minimum for the
composite is $5 million.

The custom benchmark is 60% YYY U.S. Equity Index and 40% ZZZ U.S. Aggregate Bond Index. The
benchmark is rebalanced monthly.
continued…
WHAT IS A GIPS REPORT? (CONTINUED)
Valuations are computed and performance is reported in U.S. dollars.

Gross-of-fees returns are presented before management and custodial fees but after all trading
expenses. Composite and benchmark returns are presented net of non-reclaimable withholding taxes.
Net-of-fees returns are calculated by deducting the highest fee of 0.83% from the monthly gross
composite return. The management fee schedule is as follows: 1.00% on the first $25 million; 0.60%
thereafter.

This composite was created in February 2000. A complete list of composite descriptions is available
upon request.

Internal dispersion is calculated using the equal-weighted standard deviation of annual gross returns
of those portfolios that were included in the composite for the entire year.

The three-year annualized standard deviation measures the variability of the composite and the
benchmark returns over the preceding 36-month period. The standard deviation is not presented for
2002 through 2010 because monthly composite and benchmark returns were not available, and is not
required for periods prior to 2011.
continued…
INVESTMENT POLICY STATEMENT
KNOW YOUR CLIENT
Investor Characteristics
- Situational Profiling
- Sources of wealth
- Measure of wealth
- Stage of life
- Psychological Profiling
- Traditional Finance
- Exhibit risk aversion
- Hold rational expectations
- Practice asset integration (risk/return)
- Personality Typing
- Cautious Investor
- Methodical Investor
- Spontaneous Investor
- Individualist Investor

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PERSONALITY TYPES

Decisions based primarily Decisions based primarily

on thinking on feeling

More
risk Methodical Cautious
averse

Less
risk Individualist Spontaneous
averse

81
CLIENT QUESTIONNAIRE: DECISION-MAKING
• I keep all my mail. I never throw anything out.
• My favorite subject in school was mathematics.
• I would rather sit in front of the TV than organize one of my closets.
• I would rather work by myself than in groups.
• I consider myself to be independent.
• When asked out to dinner or a movie, I generally organize the event.
• I am bothered by people who don’t work hard.
• I never leave anything unfinished.
• I generally drive very fast.
• I enjoy competitive sports.
• I rarely worry about finances.
• I like seeing scary movies.
• I am always eager to meet new people.
• I sometimes become impatient waiting for an elevator.
• People accuse me of having a “quick temper”.

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CLIENT QUESTIONNAIRE: RISK TOLERANCE
• I become nervous when flying.
• I don’t like contact sports like American football.
• When arguing with friends, I am usually the one who concedes.
• I never had a strong bond with my parents.
• I wish I could be more expressive with my feelings.
• I never raise my voice.
• I don’t like to discuss personal items with friends.
• I like art.
• I would classify my political beliefs as “liberal”.
• I am not easily excitable.
• I don’t swim in the ocean.
• I am afraid of public speaking.
• If offered a bigger house, I would pass because I don’t like the hassle of moving.
• I have had many relationships with the opposite sex.
• I often wear cutting-edge new fashions.
• I will always take the initiative when others do not.

83
INVESTMENT POLICY STATEMENT
• Return Objectives
- Income
- Growth
• Risk Objectives
- Ability to take risk
- Willingness to take risk

84
INVESTMENT POLICY STATEMENT
Constraints
• Liquidity
- Transaction costs
- Price volatility
- Ongoing expenses
- Emergency reserves
- Negative liquidity events
- Illiquid holdings
• Time Horizon
• Taxes
• Legal and Regulatory Environment
• Unique Circumstances

85
CONTACT INFORMATION

Jonathan A. Boersma, CFA

Head, Professional Standards and
Executive Director, Global Investment Performance Standards
CFA Institute
jonathan.boersma@cfainsitute.org
+1.434.951.5311
jonathanboersma

@jonathanboersma