Thursday, July 1, 2010

When is an account, not an account?

I just got a question from a client. They often bundle accounts into a "household" for reporting purposes. And, it's the household which actually reflects their strategy; that is, the individual accounts may have pieces of the strategy, but the actual strategy is acted upon at the household level. And so, how do we handle this for GIPS(R) (Global Investment Performance Standards) purposes?

In this case it would be appropriate to treat the household as the account, even though it may not legally be an account; it's a "virtual" account, yes? THIS is what you're managing, and you're using the pieces because individually you may not be able to execute your strategy. And therefore, the pieces wouldn't be in a composite by themselves, but the entire household would be. Make sense?

And, the firm's policies and procedures should reflect this, too!


  1. Stephen Campisi, CFAJuly 2, 2010 at 8:37 AM

    I think you are right to aggregate the individual accounts. The question gets to "what is the strategy?" and you indicate that it is the TOTAL portfolio that is the strategy. It is widely accepted in modern portfolio theory that we must look at the ENTIRE portfolio and not simply at the individual pieces that make up the portfolio. It is not inconsistent for these pieces to be in their own separate "accounting" portfolios, but this is a matter of bookkeeping rather than economics. Separate accounts in each asset mandate are a good example of individual pieces that make up a whole investment portfolio. We might also consider that a household investment portfolio supports several goals, each with a different time horizon, risk tolerance and need for liquidity. These pieces are then aggregated to form the overall portfolio that fulfills on the true strategy. Your analysis shows how to bring the economics of the investment portfolio in line with the performance standards under GIPS.

  2. Steve, thanks for your affirmation!


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