Mason Dixon, CFA, a portfolio manager with Langhorne Advisors (Langhorne), has just completed the request for proposal (RFP) for the Academe Foundation’s (the Foundation) $20 million fixed-income mandate. In the performance section of the RFP, Dixon indicated that Langhorne Advisors is a member firm of CFA Institute and has prepared and presented this performance report in compliance with the Global Investment Performance Standards (the GIPS® standards). The performance report presented Langhorne’s fixed-income composite returns on the actual net-of fees basis and benchmark returns net of Langhorne’s highest scheduled fee (1.00% on the first $5 million; 0.60% thereafter). The report also indicated that as of the most recent quarter, the composite comprised 10 portfolios totaling $600 million of assets under management (AUM).
Upon returning the completed RFP, Dixon thanked the Foundation’s chief investment officer, who is also a charterholder, for considering Langhorne. Dixon also indicated that regardless of the outcome of the manager search, he would like to have the CIO and the Foundation’s president join him on Langhorne’s corporate jet to spend a day at an exclusive California golf club where the firm maintains a corporate membership.
Q. Identify the ethical concerns posed by Dixon’s actions and conduct.
Regarding the GIPS standards and the performance report, presenting composite returns on a net-of-fees basis is acceptable under the GIPS standards. However, it is not appropriate to adjust benchmark returns with a hypothetical fee for comparative purposes (i.e., composite gross-of-fees returns should be compared to unadjusted benchmark returns). This adjustment of Langhorne’s performance report is invalid under the GIPS standards under Section 4.a.1: Disclosure—Requirements. The 1.00% hypothetical fee deducted from benchmark returns is surely greater than the average fee deducted in arriving at composite net-of-fees returns. An average portfolio size of $60 million implies a composite fee percentage of roughly 0.63%, or: {(0.0100 × $5 million) + [0.0060 × ($60 million – $5 million)]}/$60 million = 0.0063 or 0.63%. So, on a relative basis, deducting a larger cost against the benchmark will show Langhorne with a phantom outperformance.
可以解释一下答案吗？看不明白fee这个。。。
