Ethical and Professional Standards
Reading 4. Introduction to the Global Investment Performance Standards (GIPS)
Learning Outcome Statements
b. explain the construction and purpose of composites in performance reporting;
CFA Curriculum, 2020, Volume 1
Subject 3. Composites
The determination of which portfolios to include in the composite should be done according to pre-established criteria (i.e., on an ex-ante basis), not after the fact. This prevents a firm from including only their best-performing portfolios in the composite.
The composite return is the asset-weighted average of the performance results of all the portfolios in the composite.
The following is not required for the Level I candidate but is provided as a reference only.
- All actual, fee-paying, discretionary portfolios must be included in at least one composite.
- Firm composites must be defined according to similar investment objectives and strategies.
- Composites must include new portfolios on a timely and consistent basis soon after the portfolio is being managed.
- Terminated portfolios must be included in the historical record up to the last full measurement period that the portfolio was under management.
- Portfolios must not be switched from one composite to another unless this change is documented in the client guidelines or if there is a redefinition of the composite. The historical results must remain with the old composite.
- Convertible and other hybrid securities must be treated consistently across time and within composites.
- Before January 1, 2010, if a single asset class was carved out of a multiple-asset portfolio and the returns presented as part of a single-asset composite, cash must be allocated to single-asset returns and the allocation method must be disclosed.
- From January 1, 2010 on, carved-out returns must not be included in single-asset-class-composite returns unless the assets are actually managed separately and have their own cash allocations.
- No model or simulated performance may be linked to actual performance. Composites must include only assets under management.
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objectives: worldwide acceptance ensure accurate and consistent investment performance data for reporting... promote fair, global competition foster the notion on a global basis characteristics: ethical standard minimum worldwide standard inclusion of all fee-paying portfolios, showing a min of 5 yrs of GIPS compliants history concept definition: a composite is a set of portfolios that all follow the same investment style.i.e, your company manages high net worth portfolios for individual clients. 4 of your clients follow an international growth style philosophy. for reporting purpose, the performance of these four portfolios would be reported together in the international growth composite. (this is to prevent firms from presenting only the results of their best performance portfolio)
1. Disclose the composite return of the portfolios as a group.
2. The composite should be done according to re-established criteria (i.e. on an ex-ante basis)
3. The composite return is the asset-weighted average
Composites that includes all portfolio that is being managed by the firm + those that have been historically managed. Firm is to be fair in disclosing and representing the all the portfolio in the composite which had to be on an ex ante basis. These are to avoid 1) survivorship bias 2) representative accounts and 3) varying time period => precisely the reason to comply by GIPS.