Composite - a question

CFA Level III
#1

Hi all, a very straightforward question: what is a composite? I know it is made with actual fees paying dicretionary portfolios under management, but what is its purpose? to show how the firm behaves in managing assets? and how is a “portfolio” defined in this case? many thanks

#2

A composite is a group of portfolios with similar strategies or mandates as defined by the firm. For instance, if I manage 4 Small-Cap Value portfolios one for Company A, Co B, Co C and Company D, then I can put all 4 into a composite. I might name this my Small Cap Value Composite which will be representative of my Small Cap Value performance. A portfolio is a group of stocks, bonds, real estate and any other asset classes that are managed as a single account for an investor/institution.

#3

thanks for your reply. Then suppose that I manage a pension plan for a company, and assets are allocated only to - say - small cap equity 50% and US treasuries 50%. My “portfolio” to be included in a composite is the 100% assets or do i have two different portfolios, one equity and the other fixed income?

#4

Well it depends. You can Carve Out both pieces if you want but you MUST allocate any cash that is in the fund to both of them either based on GIPS guidelines. Or you can have them in a Balanced Composite which could be any portfolios with say a 40-60% Equity and 40-60% FI blend. You can have just 1 account in the composite or as many as fit.

#5

I have a related question. I understand that the portfolios will all go in to different composites(some may be in more than one composite) based on the objective and the firm has to report composite returns. Do these firms ever required to show firm wide return and what are the rules governing those presentations? We keep talking about only composite returns all the time…

#6

If you are showing firm wide return it would I assume just be all your composites. I guess you could put all your funds in 1 composite with a broad definition but don’t know why one would do that b/c your mixing different strategies and mandates together, not really representative. So I would so NO NOT REQUIRED.