Thursday, January 21, 2010
Adding accounts to composites ... when, exactly?
We prefer that the timing be based on time (timing, time, get it?). For example, accounts are added after they've been under management for one full month. The advantage of this is that it's fairly easy to track, to make sure the firm is doing this consistently. In addition, you can vary the timing from composite to composite. An strategy in a market that's highly liquid can perhaps have a very short time period; one where it's less liquid may have a longer period. You should include examples (e.g., if the account is added January 22, it goes into the composite February 28). This way there's no argument about what the words mean.
Some firms prefer to have accounts added when they're fully invested. When this is done, the firm has to define what "fully invested" means. For example, "when the account is 90% invested." The problem with this is (a) it's harder to test and (b) it's quite limiting, when the definition changes. For example, during 2009 many managers decided to increase their cash position, meaning that "fully invested" might become 70% invested when it was once 90 percent. Dynamic changes in the definition are difficult to capture, track, monitor, test.
A key point: be consistent.