Is inclusion of non-discretionary portfolios mandatory to claim GIPS compliance? I didn’t think it was, but a question on a CFAI exam says otherwise. I thought it was only discretionary, fee paying or not. I had another look at the section on GIPS, and I’m still confused. ideas?
lola, I assume your question concerns construction of composites. Here is what Schweser says: LOS c: Explain the construction and purpose of composites in performance reporting. A composite is a grouping of individual discretionary portfolios representing a similar investment strategy, objective, or mandate. Examples of possible composites are “Large Capitalization Growth Stocks” and “Investment Grade Domestic Bonds.” Reporting on the performance of composites gives clients and prospects information about the firm’s success in managing various types of securities or results for various investment styles. A composite, such as International Equities, must include all portfolios (current and past) that the firm has managed in accordance with this particular strategy. The firm should identify which composite each managed portfolio is to be included in before the portfolio’s performance is known. This prevents firms from choosing portfolios to include in a composite in order to create composites with superior returns.
lola, it would be helpful if you could reproduce the question, but the distinction may lie in composite construction vs. definition of the firm. Here’s two excerpts from the GIPS manual. p.7 of the PDF: “0.A Definition of the Firm — Requirements 0.A.3 TOTAL FIRM ASSETS MUST be the aggregate of the MARKET VALUE of all discretionary and nondiscretionary assets under management within the defined FIRM. This includes both fee-paying and non-fee-paying assets.” p.11 of the PDF: “3.A Composite Construction — Requirements 3.A.1 All actual, fee-paying, discretionary PORTFOLIOS MUST be included in at least one COMPOSITE. Although non-fee-paying discretionary PORTFOLIOS may be included in a COMPOSITE (with appropriate disclosures), nondiscretionary PORTFOLIOS are not permitted to be included in a FIRM’S COMPOSITES.” Link to GIPS PDF: http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2005.n5.4002
from the post above I get… non discretionary accounts must be included in total assets when defining the FIRM and must not be included in composites… is this correct?
LongOnCFA, that’s correct. hiredguns1, very clear and relevant as always. I was getting the two definitions mixed up. Thanks for clearing this up.
thanks lola. I actually didn’t remember anything about this distinction until trying to find the answer to your question. I keyword searched a copy of the PDF for all occurrences of “discretionary” The ethics and GIPS literature are expansive and so I’ve found it easier to keyword search the PDFs of each topic when trying to clarify questions, as opposed to cracking the books.
That’s a great idea, hiredguns1. I’m going to focus on Ethics in the next few weeks and your keyword suggestion will definitely be helpful.
Just to Summarise … Composite Construction ------------------------------ 1. fee-paying 2. non-fee-paying (optional) 3. Discretionary 4. nondiscretionary (Not permitted) FIRM definition ------------------- 1. fee-paying 2. non-fee-paying 3. Discretionary 4. nondiscretionary - Dinesh S
agree with firm definition. For composite construction, my understanding is: 1. fee-paying discretionary (included) 2. non-fee-paying discretionary (included) 3. nondiscretionary - fee paying or not (not included) not sure if that’s correct though, but that’s what I gather from doing a bunch of ethics Qs
lola, apparently “appropriate disclosures” must accompany the inclusion of non-fee-paying discretionary portfolios (see 3.A.1). Anyway, here’s the full discussion of requirements and recommendations for composite construction (if you’re suffering from insomnia, this ought to be the cure). “3. COMPOSITE CONSTRUCTION 3.A Composite Construction — Requirements 3.A.1 All actual, fee-paying, discretionary PORTFOLIOS MUST be included in at least one COMPOSITE. Although non-fee-paying discretionary PORTFOLIOS may be included in a COMPOSITE (with appropriate disclosures), nondiscretionary PORTFOLIOS are not permitted to be included in a FIRM’S COMPOSITES. 3.A.2 COMPOSITES MUST be defined according to similar investment objectives and/or strategies. The full COMPOSITE DEFINITION MUST be made available on request. 3.A.3 COMPOSITES MUST include new PORTFOLIOS on a timely and consistent basis after the PORTFOLIO comes under management unless specifically mandated by the client. 3.A.4 Terminated PORTFOLIOS MUST be included in the historical returns of the appropriate COMPOSITES up to the last full measurement period that the PORTFOLIO was under management. 3.A.5 PORTFOLIOS are not permitted to be switched from one COMPOSITE to another unless documented changes in client guidelines or the redefinition of the COMPOSITE make it appropriate. The historical record of the PORTFOLIO MUST remain with the appropriate COMPOSITE. 3.A.6 Convertible and other hybrid securities MUST be treated consistently across time and within COMPOSITES. 3.A.7 CARVE-OUT segments excluding cash are not permitted to be used to represent a discretionary PORTFOLIO and, as such, are not permitted to be included in COMPOSITE returns. When a single asset class is carved out of a multiple asset class PORTFOLIO and the returns are presented as part of a single asset COMPOSITE, cash MUST be allocated to the CARVE-OUT returns in a timely and consistent manner. Beginning 1 January 2010, CARVE-OUT returns are not permitted to be included in single asset class COMPOSITE returns unless the CARVE-OUT is actually managed separately with its own cash balance. 3.A.8 COMPOSITES MUST include only assets under management within the defined FIRM. FIRMS are not permitted to link simulated or model PORTFOLIOS with actual performance. 3.A.9 If a FIRM sets a minimum asset level for PORTFOLIOS to be included in a COMPOSITE, no PORTFOLIOS below that asset level can be included in that COMPOSITE. Any changes to a COMPOSITE-specific minimum asset level are not permitted to be applied retroactively. 3.B Composite Construction — Recommendations 3.B.1 CARVE-OUT returns SHOULD not be included in single asset class COMPOSITE returns unless the CARVE-OUTS are actually managed separately with their own cash balance. 3.B.2 To remove the effect of a significant EXTERNAL CASH FLOW, the use of a TEMPORARY NEW ACCOUNT is RECOMMENDED (as opposed to adjusting the COMPOSITE composition to remove PORTFOLIOS with significant EXTERNAL CASH FLOWS). 3.B.3 FIRMS SHOULD not market a COMPOSITE to a prospective client who has assets less than the COMPOSITE’S minimum asset level.”
thanks, hiredguns1. I did skim through it (yeah, it was painful), so here we go: Composites: 1. fee-paying discretionary (included) 2. non-fee-paying discretionary (optional, disclosure required) 3. nondiscretionary - fee paying or not (not included)