Creating a GIPS Composite

A little confused on just a conceptual thing. Say you have a large cap equity composite or a domestic growth composite or something like that and you are looking to add portfolios to it.

By nature, portfolios are diversified (they have various allocations to various sectors and indices). So how do you create a composite with a bunch of portfolios that have lots of exposures to benchmarks/styles outside your composite? You can just pull in the domestic growth portion of your portfolio I believe–isn’t this what a carveout is? But in general, no good diversified portfolio is actually going to be more than 50% in a single sector, so how does this composite construction thing really work? Do you just go by what the mandate is?

I’m just asking this in anticipation of a question which asks if certain portfolios were appropriate to add to a composite.

GIPS composites do not have to be a certain style or as clear cut as you mentioned. You can have a mixed composite. For example, you can have a composite for a group of portfolios that range from 20-30& growth 80-70% value and then another composite for portfolios that range from 50-60% growth 40-50% value, etc… My firm manages fixed income portfolios and we have a composite with certain asset class weights managed against a 0-3 year index and a different composite with a 0-5 year index.

ok that helps thanks

Composites are composed of portfolios that share a similar investment mandate, objective or strategy. The investment types themselves do not have to be uniform (although they can be). A client seeking diversity will likely have a muti-asset class portfolio that is part of a composite created to accomodate such characteristics.