CFAI text V6 P.302 What is a Carve-Out Segment ? Can anyone explain tangibly and/or clearly ?
In a “carve-out” you segment the performance of a particular asset class within a given portfolio. The issue is that a proportional cash position has to be allocated to the carved-out composite. For that purpose you have to apply either: beginning-of period allocation method, (cash allocation) X (carved-out asset class allocation) / (invested assets allocation) strategic allocation method, (total portfolio assets) X (Strategic target % - Asset class beginning % of portfolio)
^^^ Wished I had studied that prior to last years exam 
But remember that post 2010, carve outs are not allowed unless cash is allocated to them and they are managed seperately
My question is what is a “Carve-Out Segment” ? What is the “Carve-out” actually/tangibly meant ? How “Carve-Out Segment” defined ?
Suppose you are a mutual fund manager and have BALANCED Portfolios with mandate to invest in equities and Fixed income. 1) $100mn. - 50% in equity and 50% in cash/money mkt - money mkt component also managed by you. 2) $200 mn - 70% in equity and 30% in cash/MM - managed by you. 3) $500 mn - 60% in equity and 40% in cash/MM - since this is large sum (200mn) this cash component is sub-advised to some other fund manager who is expert in fixed income management. The point to note here is that due to your negative outlook on equities you thought it is better to shift to fixed income for time being. You are entirely responsible for this asset allocation decision between eq and FI. Basically equity returns are much higher (most of the time) than FI. If you only present returns pertaining to equity portion only, your returns look very good. But if you add the cash component returns also, they average out (performance downwards). To avoid appearing to have taken wrong Asset allocation (eq and cash) portfolio managers only use equity components and returns in their presentations. This happens if equities perform very good say with 60% pa return and cash/MMkt will only give say 10% pa. Suppose as per mandate you have to invest 50% : 50% in equity and Fixed income. But for whatever reason you had invested 30% in eq and 70% in fixed income. Which means you have to take returns for 30% equity + 20% returns from cash/FI. Only taking 30% returns for the equity portion inflates your ability (Taking only 30% from this portfolio return is CARVE out without CASH component). For GIPS compliance you have to use 30% equity returns and also returns from Cash.
My Understanding: Say a composite “global equity” consists of equity portfolios of emerging and developed markets. For example emerging market equity performed well in a year but developed equity portfolio was a drag. GIPS allows allows to “carve out” emerging market equity portfolio and include in a composite with specific emerging market equity focus. Thus the emerging market equity portfolio can be included in calculation of both the composites. Cash prior to 1 Jan 2010 was apportioned based on 2 formulas. From 1 Jan 2010 portfolio should be managed with its own cash. I believe the above allows to show improved performance of the composite with specific emerging market equity focus and well this is ethical…
AMC Wrote: ------------------------------------------------------- > My question is what is a “Carve-Out Segment” ? > What is the “Carve-out” actually/tangibly meant ? > How “Carve-Out Segment” defined ? You should be clear on this. In simple terms, a carve-out is a portion of a whole portfolio e.g. 60/40 equity/debt from say Vaguard. Suppose you are at a birthday party and somebody carves-out a piece of cake for you. This is exactly what a caruve-out means. This carve-out portion should have it’s own cash component and should be included in the performance calculation. The two formulas above are methods to calculate them. Hope it makes sense.
derswap07, TKVM for your response ! Maybe my further questions are stupid. If a carve-out is a portion of a whole portfolio e.g. 60/40 equity/debt from say Vaguard. Say, the carve-out has 20/10 equity/debt. Then the remaining is 40/30 equity/debt ? And the carve-out is still in the portfolio ? You are appreciated !
AMC, The carve out is just for the purpose of performance presentation. There is no remaining portfolio. You are just showing what that portion’s retrun is. You are not actually making it separate. There are problems in the blue boxes ( I do not remember which ones at this point) which makes this clear. May be you want to take a look. THis is a very important concept.
derswap07, OK, I will try to locate the “blue boxes”. Anyway, TKVM !