I didn’t want to hijack a related thread, so I started this one.
Say you have a client that won’t let you sell their low basis stock which amounts to over half of their total portfolio (55%). Does having over half of your portfolio automatically make you a non-discretionary client? Furthermore, can the manager carve out 45% they manage and add it to an applicable composite?
The text says non-discretionary accounts cannot be apart of a composite, but what is the threshold to be considered non-discretionary?
any constraints that could reasonably inhibit the manager from performing his/her strategy would make a portfolio non-discretionary
I agree, but what is the threshold? This exact question is in an MM Mock and the answer is you can carve it out and add it to a composite. I am just trying to understand the percentage at which it couldn’t be added to the composite.
I finally found where this is in the curriculum, yet I am still confused:
The below is mentioned once in a BB:
“A client could insist that the manager retain specific holdings that might or might not otherwise be held in a portfolio. For example, the client could direct that legacy holdings with a low cost basis must not be sold due to the adverse tax consequences of realizing large gains. In such cases, retaining the asset in the portfolio may skew performance, and—whether the impact is favorable or unfavorable in any given measurement period—the outcome would not reflect the results of the manager’s actual discretionary investment management. If holding the assets hinders the ability to implement the intended strategy, either the entire portfolio should be considered non-discretionary and removed from the firm’s composites or the individual assets should be removed and the remaining assets for which the manager has full discretion should be retained in (or added to) the composite. Alternately, the firm might include a materiality threshold in its policy, enabling it to consider a portfolio discretionary if the non-discretionary assets consist of less than a certain percentage of portfolio assets.”
Yet, 5 paragraphs down it says this:
"Actual, discretionary portfolios that are non-fee-paying may be included in at least one composite, but neither non-discretionary nor non-actual portfolios may be included in any composite."
Maybe I am getting too deep into the weeds, but is all this just saying the manager has a choice or carving out or not when they run into non-discretionary situations? Seems like this could be gamed rather easily…
I think you are getting a little deep here. The case will state whether or not the restrictions of the client prohibit the manager from executing their mandate. If this is the case, the manager can carve out the positions into a sub account that’s not part of the composite and the leave remainder in, or carve out the entire portfolio. Simple as that.
i suppose it could be gamed if the clients non discretionary holding shot the lights out, but the text doesn’t go this deep and neither should we.