CIMA Manager Search and Selection 3 — Questions and Answers
Question 1: What does a manager's 'information ratio' measure?
- The manager's return relative to the risk-free rate
- Active return generated per unit of tracking error (Correct answer)
- The proportion of the portfolio explained by the benchmark
- Total return divided by total risk
Correct answer: Active return generated per unit of tracking error
The information ratio measures active return (alpha) relative to tracking error, indicating the consistency and efficiency of a manager's active bets.
Question 2: A plan sponsor is selecting a fixed income manager and notices the manager's composite includes accounts with significantly different mandates. What is the primary concern?
- The composite may not be representative of the strategy being evaluated (Correct answer)
- The manager is violating GIPS standards by mixing mandates
- The fixed income market is too illiquid for composite construction
- The manager has too few clients to form a valid composite
Correct answer: The composite may not be representative of the strategy being evaluated
When a composite mixes accounts with different mandates, the reported performance may not accurately represent the specific strategy the plan sponsor intends to hire.
Question 3: Which of the following is an example of 'qualitative' criteria used in manager selection?
- 3-year annualized alpha
- Standard deviation of monthly returns
- Depth and cohesion of the investment team (Correct answer)
- Maximum drawdown over a market cycle
Correct answer: Depth and cohesion of the investment team
Qualitative criteria include judgment-based assessments such as team quality, investment culture, and organizational stability that cannot be fully captured by quantitative data.
Question 4: During reference checks for a manager finalist, a consultant speaks with a client who recently terminated the manager. What is the most valuable piece of information to obtain?
- The exact fee schedule the departing client paid
- The reason for termination and whether performance met expectations (Correct answer)
- The names of other clients who use the manager
- The manager's AUM at the time of termination
Correct answer: The reason for termination and whether performance met expectations
Understanding why a client terminated a manager and whether performance met expectations provides critical insight into the manager's real-world track record and client relationship management.
Question 5: A consultant recommends allocating to a manager with high active share. What does high active share suggest about the portfolio?
- The portfolio closely tracks the benchmark with minimal active bets
- A large proportion of holdings differ from the benchmark, reflecting conviction bets (Correct answer)
- The manager uses leverage to amplify benchmark returns
- The portfolio has below-average volatility relative to peers
Correct answer: A large proportion of holdings differ from the benchmark, reflecting conviction bets
High active share indicates that a substantial portion of the portfolio differs from the benchmark, suggesting the manager is taking meaningful active positions rather than closet indexing.
Question 6: What is the purpose of reviewing a manager's ADV Part 2 during the due diligence process?
- To assess the manager's short-term performance attribution
- To understand material conflicts of interest, fees, and disciplinary history (Correct answer)
- To verify the manager's current AUM and client count
- To review the manager's derivatives trading authorization
Correct answer: To understand material conflicts of interest, fees, and disciplinary history
Form ADV Part 2 is an SEC-required disclosure document that details a manager's conflicts of interest, fee structures, disciplinary history, and business practices.
Question 7: Which of the following best explains why a consultant might recommend a manager with a shorter track record over one with a longer history?
- Shorter track records are easier to analyze statistically
- The investment team that generated the long track record has since departed (Correct answer)
- Longer track records indicate higher fees charged historically
- Shorter track records have lower benchmark sensitivity
Correct answer: The investment team that generated the long track record has since departed
If the key personnel responsible for the historical track record have left, the long performance history is no longer attributable to the current team and loses its predictive value.
CIMA Manager Search and Selection 3
What does a manager's 'information ratio' measure?