Modified Dietz in GIPS

The CFA GIPS practice questions make extensive use of modified Dietz to calculate portfolio returns. But from 2010, only time-weighted returns are acceptable, right? So do you think on the exam there will be any questions requiring modified Dietz calculations? Wouldn’t seem to make sense, but I’m confused about why there is so much reliance on modified Dietz in the practice questions.

I agree with you. I’d still know it though in case we see a case where the composite at hand is before 2010.

be careful, IIRC modified dietz is still allowed, it is only when there is a large cash flow where the account must be revalued on the day of the flow, so for a small cash flow, it is still ok.

It is ambiguous… Look at the last sentence in Volume 6, page 283… The sentence starting with: "Bear in mind… (…) "

what about the tax stuff at the end of the GIPS chapter in the CFAI book? Its not mentioned in an LOS, but that still doesnt make me feel 100% comfortable that they wont test it…

It reads “…will not meet the GIPS standards for periods after Jan 1, 2010 when firms will be required to value portfolios on the date of all large external cash flows” My interpretation is that for large external cash flows, no more modified dietz. However, for very small (or no) cash flows it is allowed. All modified dietz does it apply the average daily return to the cash flow, so if it is not large, the outcome will not be materially different.

Will we have to know the asset/cash flow weighted composite return formula? Schweser said that we would not have to calculate it, but just curious as to what others think.

Chi Paul, I think you are right… Found a GIPS document somewhere on the web that defined large cash flows… Calculations: • For periods beginning 1 January 2010, at the latest, firms must calculate performance for interim periods between all large external cash flows and geometrically link performance to calculate period returns. (Note: as such, at 1 January 2010, or before if appropriate, each firm must define, prospectively, on a composite-specific basis, what constitutes a large external cash flow.) For information on calculating a “true” time-weighted return (see below). • External cash flows must be treated in a consistent manner with the firm’s documented, composite-specific policy. Cash Flow Principles - The following are guiding principles that firms must consider when defining their Cash Flow policies: • An external cash flow is a flow of cash, securities, or assets that enter or exit a portfolio, which are generally client driven. When calculating approximated rates of return, where the calculation methodology requires an adjustment for the daily-weighting of cash flows, the formula reflects a weight for each external cash flow. The cash flow weight is determined by the amount of time the cash flow is held in the portfolio. • When calculating a more accurate time-weighted return, a large external cash flow must be defined by each firm for each composite to determine when the portfolios in that composite are to be revalued for performance calculations. It is the level at which a client-initiated external flow of cash and or securities into or out of a portfolio may distort performance if the portfolio is not revalued. Firms must define the amount in terms of the value of the cash/asset flow, or in terms of a percentage of portfolio or composite assets. • The large external cash flow (described above) determines when a portfolio is to be revalued for performance calculations. This is differentiated from a significant cash flow, which occurs in situations where cash flows disrupt the implementation of the investment strategy. Please see the Guidance Statement on the Treatment of Significant Cash Flows, which details the procedures and criteria that firms must adhere to and offers additional options for dealing with the impact of significant cash flows on portfolios