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How to Answer this Typical Performance Measurement Exam Question

How to Answer this Typical Performance Measurement Exam Question

In this article, we look at performance measurement, something that CII AF4 Investment Planning candidates often have to do in the exam.

This is a typical exam type question:

Darcey is a higher rate taxpayer.  A year ago, she invested £150,000 in a unit trust.  She is now considering selling this.

The table below shows how the unit trust has performed against its benchmark.

Benchmark
UK Equities
International Equities
Bonds
Property
Emerging Markets
Overall
Allocation %
25
25
30
11
9
Performance %
4
15
8
12
6
9.01
Unit Trust
UK Equities
International Equities
Bonds
Property
Emerging Markets
Overall
Allocation %
23
27
35
6
9
Performance %
6
13
10
8
12
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Firstly, candidates will normally be asked to:

Calculate the percentage change in the value of Darcey’s holdings.

To do this, you need to multiply the asset allocation of the holdings by performance.

UK Equity
6% x 23%
1.38%
International Equities
13% x 27%
3.51%
Bonds
10% x 35%
3.5%
Property
8% x 6%
0.48%
Emerging Markets
12% x 9%
1.08%
9.95%

The question might then ask you to comment on the investment’s asset allocation and fund selection; with this one, it might be emerging markets and equities.

We can say that the UK equities percentage allocation is underweight compared to the benchmark, and this was the worst-performing asset class, but the performance is better than the benchmark, so fund selection was better.

For international equities, the fund was overweight compared to the benchmark and was the best performing asset class, but the fund underperformed the benchmark, so fund selection was poorer.

For emerging markets, the asset allocation was exactly the same, but the fund outperformed, so fund choice was better.

The exam may then go on to ask candidates to calculate the current value of Darcey’s holding.

For this, we take the initial value and increase it by the performance return, so £150,000 + (£150,000 x 9.95%) = £164,925

Finally, candidates may be asked to calculate Darcey’s capital gains tax liability if she were to sell the unit trust holding (assuming she has made no losses).

To do this, we take the final value of £164,925 and deduct the initial investment value of £150,000.  This leaves us with £14,925.  From this, we deduct the annual exempt amount of £12,000, which leaves us with £2,925.  As Darcey is a higher rate taxpayer, we use the rate of 20%.  Her liability is, therefore, £585.

Anyone planning to sit the AF4 exam would do well to practise this type of exercise.

Grab the resources you need!

If you’re studying for your CII AF4 exam, and you’re wanting to feel confident on exam day, you’ll need to be well prepared. Grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the AF4 calculation workbook taster now!

Click here to download our free calculation workbook taster for CII AF4

Alternatively, you can download taster resources for J10 or R02 if you’re revising for either of those exams.