Ethics

AMC Asset Manager Code 针对资管公司

Basic

• Differences between AMC and Professional Standards

  • Code and Standards

    : for individual investment professionals who are member or candidate of CFA

  • AMC

    : for investment management firms 不必须遵守，协会鼓励遵守

Components of AMC

• A: Loyalty to Clients

• B: Investment process and actions

• C: Trading

• D: Risk Management, Compliance, and Support

• E: Performance and Valuation

• F: Disclosure

ABC 与 codes and standards 一致

D: Risk Management, Compliance, and Support

1. Managers must comply with code and legal requirements 需要符合codes和当地法律要求

2. Appoint a compliance officer 公司需要任命一个合规负责人

   • Compliance Officer should competent, knowledgeable, and credible

     • should be independent from the investment and operations 独立于投资和运营。不能是公司的 senior portfolio manager 不能是 investment manager

     • Correct: by appointing an existing employee to act as a Compliance Officer the Fund would be in Compliance with the Asset Manager Code assuming that the employee is competent, knowledgeable, and credible and is empowered to carry out their duties.

   • Report directly to the CEO or board of directors.

   • eastblish backup office and opertaional space,

   • Deal with key employee death

3. Portfolio info that are supplied to clients should be confirmed or review by Independent from third-party. 需要有独立第三方确认提供给客户的信息是对的

   • The compliance department would be considered an independent third party because compliance is not involved with compiling or presenting the information to clients.

   • and when such third-party prices are not available, the code calls for the use of “good faith” methods to determine fair value. 如果 price not available (for illiquid asset), 可以自选方法，如GIPS

4. Maintain records for an appropriate periods 留存就行，没说存多久

5. Employ qualified staff, and sufficient human and technological resources.

6. Establish a business-continuity plan

   • adequate backup, preferably off-site, for all account information 要在公司外部储存。

   • with alternative plan 对于大公司，不光要有 back-up 还要有 alternative back-up plan

   • plans for communicating with critical vendors and suppliers

   • plans for employee communication, coverage of critical business function

   • plans for contacting and communicating with clients during a period of extended disruption. 如果持续中断需告知用户，如果短暂终端无需告知用户（但需要与员工和供应商vender沟通）

7. Establish a firm-wide risk management process

E. Performance and Valuation

• Preset performance information that is fair, accurate, relevant, timely and complete. No misrepresentation.

• Use fair-market prices

F. Disclosure

1. Communicate with clients timely

   Clients may reasonably expect to receive regular performance reporting about their accounts. Without such performance information, even for investment vehicles with lock-up periods, clients cannot evaluate their overall asset allocations (i.e., including assets not held or managed by the Managers) and determine whether rebalancing is necessary. Accordingly, unless otherwise specified by the client, Managers must provide regular, ongoing performance reporting. Managers should report to clients at least quarterly, and when possible, such reporting should be provided within 30 days after the end of the quarter.

2. Disclosures are truthful, accurate, complete, and understandable

3. Include material facts

4. Include:

   1. conflicts of interests

   2. regulatory or disciplinary action

   3. Investment process, including information regarding lock-up periods, strategies, risk factors, and use of derivatives and leverage

   4. At minimum, disclose Gross-and net-of-fees returns, unusual expenses

      • only direct trading expenses should be deducted in calculating gross-of-fees returns. Custodial fees cannot be considered a component of direct trading expenses.

      • Gross & Net 都是扣除 trading cost 后

      • Net 的区别是，还会扣除 performance fee, management fees, incentive fees

      • custody cost 都不扣除

   5. Retrospectively disclose

   6. Disclosure specific management fee, incentive fee, etc

      • disclose actual fee with itemisation

   7. Disclose average or expected enpenses

      • to prospective clients the expected fees

      • managers must disclose to prospective clients the average or expected expenses or fees clients are likely to incur, and to existing clients the actual fees and other costs charged to them.

   8. Soft or bundled commission

   9. Valuation methods

   10. Shareholder voting policies

   11. Review or audit

   12. Significant personnel or organisational changes

   13. Risk management processes

In sum,

Compliance Officer

-> Business Continuity Plan

-> Fees Related Disclosure

GIPS

• The GIPS standards require that all actual, fee-paying, discretionary segregated accounts must be included in at least one composite. 一个 portfolio 可以在多个 composite 中

  • The GIPS standards state that firms must include all actual, discretionary, fee-paying segregated accounts in at least one of the firm’s composites. If the segregated account meets the defined criteria for inclusion in more than one composite, the firm must include the account in all the firm’s appropriate composites. For example, a firm may have a large-cap composite and a large-cap growth composite. If the firm manages a segregated account that meets the criteria for inclusion in the large-cap composite as well as the large-cap growth composite, the firm must include the account in both composites.

• The GIPS standards state that portfolios must be valued in accordance with the definition of fair value, and that firms must value portfolios in accordance with the composite-specific valuation policy. The GIPS standards do not require firms to adhere to the principles of financial accounting.

Firm comply with GIPS must provide GIPS report to all prospective clients, and limited distribution pooled fund investors.

Two reports:

• GIPS Composite Report

• GIPS Pooled Fund Report

For GIPS compliance, a single verification report must be issued with respect to the whole firm. Verification cannot be carried out only on a composite and, accordingly, does not provide assurance about the investment performance of any specific composite. The Standards stress that firms must not state or imply that a particular composite has been “verified.”

Years

• Annual performance should be at least 5 years, extended each year until at least 10 years.

• If the composite's existence for less than 5 years, then present returns since inception, and build over time to 10 years. 如果存在少于5年，则从建立日起，直到存续10年

Required Elements of GIPS Composite Report

1. Compote and Benchmark annual returns for all years

2. The number of portfolios (if >= 6) in the composite

3. The amount of assets in the composite

4. The Amount of total firms assets at the end of each period

5. A measure of internal dispersion of individual portfolio returns for each annual period if the composite contains >= 6 portfolio

6. If monthly composite returns are available, a three-year annualised ex post s.d. of the composite and benchmark returns as the end of each annual period.

Key Terminology

• Composite: an aggregate of one or more portfolio 很多个 portfolio 的集合

• Segregated Account (SMA): a portfolio owned by a single client.

• Pooled Fund

  • Broad distribution: mutual funds

  • Limited distribution: hedge fund

• Fair representation and full disclosure, GIPS is voluntary 自愿的，不是强制的

• GIPS consist of (1) requirements which must be followed, (2) recommendations which are optional

• when GIPS conflict with law, then comply with the law, and disclose the conflicts

• GIPS is applied Firm-wide

• Total Firm Assets refers to the aggregate FV of all assets, including sub-advisors, but not including advisory-only assets (committed capital)

• Changes in firm's organisationare not permitted, to lead to changes in historical performance 不能通过改 organisation 去改变 historical return，return不能重溯

• Discretionary Portfolio 指 FM 能管控的，non-discretionary 指受限的restricted investment process，不能由 FM 决定，所以 non-discretionary 的表现不能代表公司业绩的好坏

  • Although both discretionary and non-discretionay portfolios are included in total firm assetes, only discretionary portfolios are included in composites 指把 discretionary 的纳入 composite 中

• GIPS reports need to be given to the potential clients

• not like actual performance to historical theoretical performance 不能混淆历史和模拟的 return 与 真实的 return

Discretion, Mandates, Composite Construction 判断什么该放入 composite

• Discretion: discretionary 业绩能否反应 FM 的投资能力

  • if constraint is not material, then discretionary, then include in composite 如果client设置的constraint 不重要，port依然能反映 FM 的能力，那么放入 composite 中

  • 否则（不能反映FM能力），则为 non-discretionary, 不放入 composite

• Mandates

  • No model or hypothetical portfolio should be included into composite 只能纳入 actual 的，假设的模型的理论的都不能纳入

    • Model, hypothetical, back-tested, or simulated returns are all considered as theoretical performance

• Include or Exclude

  • New portfolio should be included as of the beginning of the next full performance measurement period. 下个完整期间业绩出来之后，才纳入。如5.15纳入，则6月完整业绩出来后，才能算上，五月不算

  • Terminated portfolio 入月中终止，则当月全都不算了。如5.15截止，那么从包含这个 port 的只能出现在4月，5月整月都不能包含了

    • Terminated portfolios must be included in the historical performance of the composite through the last full measurement during which the firm had discretion. The last full measurement period during which the Chimie Bio-Industrielle portfolio was under the management of Ord Capital Management was the month of March.

  • Switch from one composite to another.

    • Iff revise mandates

    • Iff no longer fit the original

    • Otherwise, stay in the original composite, do not switch

    • historical return 不能 switch，只能 remain in the original composite

  • Significant Cash Flow, may be temporarily removed.

    • "Significant "should be defined ex ante

    • Otherwise, use temporary new accounts for remove the effects of significant CF

  • Could define minimum asset level

    • Do not retroactively use updated minimum level 不能回溯

    • Prior performance must remain 保留历史业绩

  • Minimum asset level: 如果portfolio value 低于 minimum asset level to be included in a composite, 那么在低于的时间段要把它摘除

    If the firm sets a minimum asset level for portfolios to be included in a composite, the firm must not include portfolios below the minimum asset level in that composite.

Composite Return Calculations

• All, (1) Actual, (2) Fee-paying, (3) Discretionary (4) Pooled Portfolio must be included into at least one composite.

• Non-discretionary, Segregated Accounts (SMA), and Pooled Funds must not be included into composites

• Non-fee-paying discretionary segregated accounts and pooled funds may be included in a composite, but additional disclosures may be required 可放可不放

Return Calculation Methodologies

什么时候 用 TWR & MWR

• MWR: 公司能自己决定控制外部现金流的情况

  • If firm has control over the external CF

  • Portfolios are closed-end, fixed life, or fixed commitment, or illiquid investment

• TWR:

  • 其他时候

Calculation Frequency

Private Market Investment Portfolio: real estate, infrastructure, PE, (illiquid, not publicly traded)

• MWR at least annually

• TWR at least monthly, or then there is a large external CF

• Private market investment portfolio, quarterly

• Pooled funds ( not included in composites), annually, at the time of redemption and subscribtion

P.S.

• Monthly return is through calendar month end or last business day

• for Pooled Funds: be valued at the time of any subscriptions or redemptions 有申购赎回就要value it

True TWR: valuate and calculate returns with every external CF.

TWR

• (1) 先算 portfolio return, (2) weighted those portfolio, get the composite return

Large/significant CF 全分段compound，因为是large CF所以不再weighted average

Returns are calculated geometrically, where $r_{t,1},r_{t,n}$$r_{t,1}, r_{t,n}$ are the sub-period returns

$1+r_{TWR}=(1+r_{t,1})(1+r_{t,2})...(1+r_{t,n})$$1+r_{TWR} = (1+r_{t,1})(1+r_{t,2})...(1+r_{t,n})$

For non-large CF (Diaz + IRR)

We use the following methods to estimate TWRs

• Modified Dietz Method

  $r_{ModDeitz}=\frac{V_1-V_0-CF}{V_0+\sum (C{F}_i\times w_i)}$$r_{ModDeitz} = \frac{V_1 - V_0 - CF}{V_0 + \sum (CF_i \times w_i)}$

  $w_i=\frac{CD-D_i}{CD}$$w_i = \frac{CD-D_i}{CD}$ 即到月底的时间占比 如 23rd of April，则为 $\frac{30-23}{30}$$\frac{30-23}{30}$ for monthly weights

  , where $CD$$CD$ is the total number of calendar days, $D_i$$D_i$ is the number of calendar day till the time CF occurs 至CF发生的时点

• Modified IRR method (trial-and-error 类似 IRR 的算法，试出来的)

  $EndValue=V_1=\sum (C{F}_i\times (1+r{)}^{w_i})+V_0\times (1+r)$$EndValue = V_1 = \sum (CF_i \times (1+r)^{w_i})+V_0 \times (1+r)$

  把中间现金流按对应时间compound到未来，把initial value compound到未来

  倒挤出 r

  computational intensive

P.S. Fee, Cash,

• Return period less than one year should not be annualised

• 算 total returns 时要包括 Cash, and Cash Equivalents 。所以会导致 cash drag

• Return should be calculated after deducting transaction costs 费用需要扣除 (brokerage commissions, exchange fees, taxes, spread of brokers, legal / financial / advisory / investment banking fees)

  • Custody Fees 托管费，不用扣除

  • Bundled Fees 可扣除可不扣除，如果 bundled fee 中，transaction fee占大多数，则扣除

  • 扣除的 transaction costs typically take the form of brokerage commissions, exchange fees and/or taxes, and/or bid–offer spreads from either internal or external brokers

Miscellaneous Return Calculation

• Return less than one-year cannot be annualised 不到一年的 return 不能年化

• Return of Cash should be included into total return

• return must be calculated after the deduction of transaction ocsts

  • 减去 transaction fee 后是 Gross, 再减去 management fee 后是 Net

  • 不减 custody fee

  • P.S. 如果 transaction costs are in bundle fee (无法拆分), composites must reduce the gross-of-fee return by the entire amount of bubdle fee

Valuation Hierarchy 判断 fair value 是什么

Apply a fair value methodology while valuing assets. 在用Fair Value 估值时，应该如何估

1. The valuation must be determined using the objective, observable, unadjusted quoted market price for an identical investment in an active market on the measurement date. 第一层次，用可获得的 market price of identical investment

2. If unavailable, GIPS recommend the alternative methods in declining order: 如果不能达成，用一下顺序推测 fair value

   1. Quoted price for similar investment in active markets

   2. Quoted price for identical or similar investments in non-active market

   3. Market-based inputs, other than quoted pries, that are observable for the investment 再次者，由于无quoted price了，只能用 market-based inputs

   4. Subjective, unobservable inputs. 最次者，用在主观

Presentation, Reporting, Valuation, Verification

Core Elements of a GIPS Report that presents a TWR

• annual return

• number of portfolio ( if >= 6 )

• amount of assets in that composite

• amount of total firm assets

• a measure of internal dispersion (in composite level)

  • high/low range, equal-weighted s.d., asset-weighted s.d.

• three-year annualised ex-post s.d. of the benchamark and the composite

Portability

Performance from the target may be used to represent the historical performance of the new or acquiring firm and linked to the performance of the acquirer if the firm meets the following requirements on a composite-specific or pooled fund-specific basis

在 A 收购 B后，是否要把 B 的业绩展示出来？如果符合以下 ABC（意味着the target 被收购后还是可以独立自主投资，原班人马不变，记录有保存），则可以展示B的业绩

1. A: All investment decisions makers must be employed by the acquirer A雇用了B 所有做投资决策的人

2. B: Decision-making process must remain substantially intact and independent within the acquirer B的投资人依然可以 完整 独立 于A去做投资决策

3. C: The acquirer must have records to support the performance (historical records are available)

4. D: there must be no break in the track record between the target and the acquirer

(ABC) 其一不满足，则不满足。如果ABC都满足了，只有D不满足即Acquirer和target的记录有断档，可以展示 Target 的 performance, but the two performance records may not be linked

if a GIPS-compliant firm acquires the target, the firm is given a one-year to bring any non-compliant target into compliance for future reporting periods. Assets of the acquired non-compliant firm or affiliation must meet all the requirements of the GIPS standards within one year of the acquisition date, on a going forward basis. (A,B,C,D)

Verification

GIPS recommend the verification, but not compulsory 推荐不强求verification

Verification must be performed by a qualified and independent third party 需要有第三方来验证

A single verification report is issued only w.r.t. the whole firm, not on single composite or pooled fund 需要验证整个公司，不能只是一个composite

Scope of Verification

If a firm does not meet all the requirements of GIPS standards, it may not state it's in compliance with GIPS 如果有不符合GIPS的要求，就不要说自己符合。是整个公司都不符合，不能只说是一个 composite不符合

Verified firms could choose to have a detailed performance examination

How to Do

• Risk Tolerance: Ability * Willingness, (ability: 2i ), 判断 above or below average