Thursday, September 24, 2009


One great benefit from conferences is the questions that are posed ... they sometimes identify things that weren't previously considered.

Effective 1 January 2010, firms must revalue portfolios for large cash flows. Okay, fine. AND, unless you revalue for ALL flows, you can't then revalue for SOME that fall below what you define as large. Example: you use Modified Dietz on a monthly basis; your definition of large is 10%; you get an 8% flow in, you cannot revalue. Okay, clear enough.

What happens if you have a composite, that is made up of mutual funds and separate accounts, where the funds are valued daily and the funds use monthly Modified Dietz? Looks like we have a problem :-(

Clearly, some guidance is needed. I would favor an amendment whereby in these cases, where you have some funds that you value daily and some that you value monthly, then the "large" rule will only apply to those that are valued monthly. There may be some holes here ... we'll have to see.


  1. I have to say, I was a bit surprised that the intention (at least as stated at the conference) is that the large cash flow rule would would prohibit the example you state where mutual funds that are valued daily are included in the same composite as separate accounts are valued using Modified Dietz.

    I would favor the same amendment.

  2. Did not go to the conference, but want to add my comment. What if the composite is made up of separate manage portfolios: some are value daily because there is a need for constant cash flows, some are value monthly using Modified Deitz, and others with significaiton cash flows uses Modified BAI. Is this a good composite?

    As long as the intention is not to mislead the final users (I'm sure others would argue differently), I would say we could use this composite.

    The more uncertainly we see in the GIPS language, the more rules GIPS can introduce. I'm not in favor to see the current GIPS rules grow to the size of the US tax law rules or UCC rules.

  3. That's the problem: as the rules are written today, you would be required to treat ALL the accounts the same way: either they all get revalued daily or you revalue only for a large flow. Stay tuned for clarification.

  4. I wasn't able to find this GIPS rule that you wrote. If possible, would you state the location of this GIPS language so I may share this with our internal team?

  5. I think I found the rule (2.A.2 - 4). If this is the rule, just by reading the statement, I don't believe my interpretation is incorrect.

    If what you stated is truly GIPS intention, I have a feeling (including myself) those that did not attend the conference would interpret the language differently. The verifier will have a hard time persuading the firm to follow this idea. At the same time, each firm might have a difficultly following this rule.

    Either way, I guess you're right. Some clarification (not a new rule) is needed.

  6. Paragraph 2.A.2 reads, in part, "External cash flows must be treated in a consistent manner." There may be another reference that indicates that this means that you can't revalue below your definition of "large." I'd have to check. "Consistent manner" means that you can't have one revaluing daily and another revaluing only when large flows occur. I believe this is the interpretation we're dealing with.


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