A firm can always create new composites, provided they abide by all the rules. In this case, the combination would create a third composite, which is the aggregation of the two that are close, thus all accounts that are in these two composites will now also be in the new one. But now the firm has three composites when they once only had two; can they terminate the two old ones now that they've created a combination of them?
Unfortunately, there is nothing in GIPS that addresses this, but I have it on good authority that yes, a firm can terminate composites! Recall that firms must have all actual, fee-paying, discretionary accounts in at least one composite. And so, as long as this rule will remain, then a firm can terminate a composite that it no longer needs. This composite name and description must be included on the firm's list and description of composites (soon to be list of descriptions) for at least five years after it's terminated. I'd also advise the firm to include an explanation as to why the composite was terminated in the composite presentation as well as the firm's policies.
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Would the new composite's performance have to start fresh? Or could they (1) calculate historical performance of the new composite back to the inception of the oldest account in the new composite or (2) use the performance portability rules of the GIPS to keep historical performance of a "surviving" composite?
ReplyDeleteDerek, thanks for your question.
ReplyDeleteAs noted above, the rules need to be followed, meaning that all accounts that meet the new composite's criteria have to be included for a minimum of five years. Since the new composite is a combination of the other two, there is no restatement.
Firms always have had the opportunity to create new composites and it's always been possible for accounts to be included in multiple composites. This post deals with the case of a firm realizing that the differences they expected to see didn't happen (e.g., if a firm split their taxable from non-taxable accounts and then discovered that the differences are so slight that it would be better for them to be combined) and the concept of terminating a composite.
Recall that the standards aren't intended to answer every question, so it's perhaps not surprising that this topic hasn't been addressed. We know that composites can terminate and so we're only addressing the active step of doing just that.
Hope it's helpful!