However, I have begun to think about the aggregate method a bit more, as I said I would. I have concluded that there are three issues worth considering:
- When using the aggregate method, should the firm revalue when a new account is added during the period? I think that I demonstrated that doing so can result in erroneous and/or misleading results.
- When using the aggregate method, should (as required by the GIPS Q&A) the composite be revalued for large flows (other than for new accounts)? Here, I believe there is evidence to suggest that by revaluing the result will be more accurate, and so I'd say "yes."
- Should the aggregate method even be permitted? Or, if permitted, should caution be given in its use? Clearly, this is a much more sweeping question and I have concluded that this method is potentially flawed, both in theory and in reality and should no longer be permitted.
And we have such a case with the aggregate method:
The composite return is supposed to reflect an average of actual results: but the actual results were all 4.00%; it appears that our aggregate method generated composite return overstates what actually occurred. Both asset-weighted methods produce correct results. No one is managing the composite, so what does it matter how the composite did?
A colleague, whose opinion I value greatly, offered the following:
"if you treat the composite as if it is one big portfolio
then its only logical that the cash flow rule applied to that composite as if it were a single composite
I totally agree...it is only logical that the cash flow rule should apply. But in this case, logic fails.
In our July newsletter I will provide additional examples which call into question the aggregate method's efficacy as a composite return method.