Wednesday, January 20, 2010

Valuing for large flows

Firms that claim compliance with the Global Investment Performance Standards (GIPS(R))are now required to revalue their portfolios whenever large cash flows occur. A few points to make:
  1. What if you calculate composite returns and use the aggregate method (i.e., where you treat the composite as a single account)? Must you still revalue? Yes!
  2. Must you have a firm-wide definition of what "large" is? No! You can have different definitions per composite. You may want a smaller threshold for some and a larger for others. This is fine.
  3. Can "large" be "too large"? Yes! We recommend establishing a level at 10% or less.
  4. What if you revalue daily? Must you still define what "large" is? No. In your case, large = anything above zero (actually, it's zero).
  5. Can you revalue on a case-by-case basis for flows below your definition of "large"? No! This would constitute cherry-picking and isn't permitted.
  6. What if the composite has separate accounts, that are revalued when flows are above 5%, and a mutual fund that revalues every day. Is this a problem? In theory, yes. In actuality, we believe that clarity will be forthcoming that says that this isn't an issue. That is, if there are accounts (e.g., mutual funds) in your composite that regularly value daily, along with accounts that don't, then as long as you're consistent this shouldn't be a problem. But again, no formal word has come forward, yet, though we anticipate it.
  7. Can you change your definition of "large"? Yes, on a prospective (forward looking) basis. You should document what it was, when it changed, and what it is, now
  8. How do we decide what "large" should be? We recommend that you run some tests against historic data, and try different thresholds for different time periods. See what the results look like and determine what you are comfortable with. The more frequent, the more work.
  9. What does "revalue" mean? Good question! (as if the others weren't any good) In our opinion, "revalue" means more than "reprice" (if it meant the same thing, why don't the standards say "reprice"?). To us, revalue means reconcile, too. That is, to ensure that the portfolio's valuation is as accurate as possible.
  10. With this new change, does Modified Dietz go away as a legitimate way to calculate returns? No! You can use Modified Dietz for flows that are below your minimum.
  11. Does this rule apply to real estate and private equity? No!
Hope this helps!

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