Carve Outs

CFA Level III
#1

I don’t get this stuff. All I can think about are turkeys. What the heck is a carve-out?

#2

it is part of the portfolio which is reported as a separate portfolio in a composite like you take equity out of balanced portfolio and report it as a separate portfolio in equity composite

#3

If you have a 60/40 fund (60% equity and 40% FI) and you want to “carve-out” the equity into an equity composite and the FI into a FI composite instead of putting them in a Balanced composite. But remember you have to allocated cash to the Carve-outs.

#4

and disclose allocation strategy too. Cash which you dont manage should also be disclosed

#5

^Even if you don’t manage the cash, as a manager, you have can decide the cash allocation, more cash create a bigger return drag. Just my 2 cent.

#6

Can you have a balaned composite or no?

#7

Yes.

#8

for example: i have the power to decide that 10% of the account will be allocated to cash my dedicated cash manager will decide in which money mkts instruments that cash is invested so as long as I have the power to move that 10% up or down, regardless of it being managed by other people, I must allocate cash to carve outs is this correct?

#9

You must allocate cash to the carve outs, regardless if cash i managed outside the funds, I believe. If there is no cash outside the funds then you dont have to worry about it.

#10

correct but i thought carve outs were disallowed at some pt in the future or something like that.

#11

who knows :slight_smile:

#12

s23dino Wrote: ------------------------------------------------------- > correct but i thought carve outs were disallowed > at some pt in the future or something like that. some point is like 2010

#13

so you can’t carve out your portfolios after 2010? So for balanced portfolios you have to keep them in balanced composite and up until 2010 and you can do either/or (carve them out or use them in balanced)?

#14

after 1 January 2010 crave-outs are not allowed one exception is, if a a certain stock or FI portion of the portfolio is managed separatelly, it can still be carve-out and all of that should be accompanied with appropriate disclosure

#15

good call volkovv i remember that now, thats right-thanks

#16

Thank you all - it is very clear now.

#17

Remember, 2 methods for carve-outs: 1) beginning of period allocation method 2) strategic allocation method

#18

so what exactly does “allocate cash to carve-outs” mean? can someone give me a good example of how this topic migh be tested?

#19

carve ous will be no more in 2010, right?

#20

So to summarize: - Carve Outs allowed until Jan. 1st, 2010 unless they are separately managed at which point full disclosure is required. - Cash must be allocated to carve-outs based on either: i) Beginning of Period Method ii) Strategic Allocation Method Does that about sum it up?