III(A): Loyalty, Prudence, and Care

Nils van Heuven, CFA, manages a mutual fund with a mandate to invest in global sovereign bonds and cash equivalents. The fund must invest at least 92% of assets in global sovereign bonds with an average credit rating of at least investment grade (BBB- or higher) and may invest at most 8% of assets in cash equivalents. Currently, 94% of the fund's assets are invested in global sovereign bonds, all rated AAA- or higher. Van Heuven is planning to sell some of the global sovereign bond holdings and use the proceeds to make a new investment. According to Standard III(C): Suitability, which of the following is the _most suitable_ new investment for the portfolio?

Incorrect. Although the fund may invest in cash equivalents, this would require 3% of the portfolio's bond value be sold and 3% of cash equivalents bought. Then, cash equivalents would be more than 8% of the fund's asset value, which is prohibited by the fund's mandate.

Incorrect. Global equities are not allowed by the fund's mandate. In the case of a mutual fund, the manager owes a duty of suitability to the client, defined as the fund itself, as articulated by its mandate.

Correct. Adding more global sovereign bonds would not upset the allowed proportions of bonds and cash equivalents. Although the bonds are rated less than investment grade, as long as the average of all the bonds' ratings are above investment grade, the fund is being managed to its mandate. (If 3% of the bonds' value is below investment grade, and 91% is above, the fund's bonds will have an average rating above investment grade.)

Cash equivalents valued at 3% of fund assets

Global equities added to provide diversification

Global sovereign bonds rated CCC+ and valued at 3% of the fund assets