Case Study: The Forgetful PM

Acme Financial Services is a large investment firm with a broad base of products spanning multiple asset classes.Acme believes in active (as opposed to passive, index-oriented) management and compensates its managers based upon their value added relative to their benchmarks as well as to their total assets under management.

Randy Gould is a very successful large cap equity portfolio manager with ACME Financial Services.He manages an extremely large ($10 billion) mutual fund and a number of separate accounts for pension plans, endowments and high net worth individuals.His book of institutional accounts total a little over $4 billion in assets under management.

The investment strategy for all of these accounts is the same. Gould is known for his high volume of trading activity, a fact fully disclosed in the mutual fund's prospectus and the presentations made to the institutional clients before they signed up for the investment service.

Vanessa Chang in the performance department is responsible for the GIPS compliance program[1]. One of the forensic tests she runs monthly is to match the trailing 12-month gross of fee performance numbers for the mutual fund and the institutional accounts against an asset weighted average performance number for all of the accounts.Early in December, she encounters an unusually high dispersion among the individual account numbers. It appears that the mutual fund's performance has been slipping against the returns of the institutional accounts. There is no apparent change in the dispersion among institutional accounts which continue to cluster closely together.

Delving into the issue, Vanessa pulls data for the month of November from the portfolio system.This data consists of trades and beginning and ending valuations for the mutual fund and one of the larger institutional accounts in the composite group she employed for the initial testing. The institutional account is very close to the median performance of the institutional accounts and is therefore a decent proxy for the group as a whole.

She is immediately very alarmed to see absolutely no trade data in November for the institutional account other than income transactions such as dividends and accruals and short term cash activity.Fearful that something awful has occurred in the accounting area, she contacts the head of the operational team responsible for trade processing and settlements who quickly confirms that the portfolio manager, Gould, posted no trades to the account during the month of November and in fact has not done so since the middle of October. Repeating this inquire for other institutional accounts, she finds the same results. Meanwhile, during the period in question, the mutual fund was very actively traded.

Vanessa contacts, Conrad Weiss, the Product Manager for large cap institutional products (a marketing position), who agrees to follow up with Gould. This is the agreed upon escalation path for anomalous performance issues.Forty-eight hours later, Weiss calls back and recounts his conversation with Gould.Essentially, due to the very volatile market that broke out in October, Gould has ramped up his already high volume trading strategy.Because of systems limitations he found himself unable to input all the desired trades across all the large cap funds for which he was responsible. Gradually he simply began to ignore the institutional accounts. By mid-October he was actively trading in the mutual fund only.

Who are the principal actors and stakeholders? Determine if there have been ethical or regulatory breaches and what principles have been violated.Determine if there has been material harm to any stakeholder and what steps are required to mitigate or correct it. Also, discuss any other issues of ethics, compliance or good governance that extend beyond the immediate details of this case. What went right and what went wrong?