Thursday, September 23, 2010

Catch-all composites are alive and well...

In 1993, while attending a conference on the AIMR-PPS(R) standards, a speaker made the statement that virtually all compliant firms would have "turkey composites." I was a bit dumbfounded by this, because at the time I didn't know what a "turkey composite" was. Well, I came to learn that it meant a "catch-all" composite: that is, a composite where firms could stash all those accounts that just didn't seem to fit anywhere else. This concept made no sense to me, since composites are supposed to comprise accounts with similar investment styles; not be a place for misfits. Eventually, AIMR announced that such composites weren't permitted.

That's all well and good, but the reality is that there are still firms that use them, even though GIPS(R) (Global Investment Performance Standards) also disallows them. This week we learned of an asset manager that has such a composite, even though they're verified! But we know that this particular verifier has a "soft spot" for such things, and apparently doesn't mind if their clients want to avail themselves of them. Interestingly, this asset manager actually knows themselves that they're not permitted, but still has one.(The SEC, of course, may have a different opinion than this firm's verifier, but that is an entirely different matter).

But what does this actually mean? Well, in a nutshell it means that the firm isn't actually compliant, because having such a composite invalidates their claim.

Yes, these composites are a nice tool to put those accounts that just don't seem to fit anywhere else; and yes, they save on having lots of small composites, but unfortunately, they're not allowed. But clearly that isn't stopping firms from still using them.


  1. David,

    This conversation dovetails nicely with your earlier discussion of transitioning accounts. Assuming you are a monthly constructor, what do we do with accounts that were removed on 1/1 from their old composite to start their transition to the new strategy and are placed into the new composite on 2/1? These accounts really have no home, but we do not want to remove them from AUM. The answer is a transition (catch all) composite. I believe this is commonly done to comply with the all of the discretionary accounts must be in at least a composite. Would you argue the account should be omitted from all composites?

  2. Interesting points you make. First, the "composite" you're using for transitioning accounts falls under the broad context of "administrative composites," and aren't composites as we mean in GIPS: they're not required but can be helpful tools to manage and keep track of those accounts which aren't in GIPS composites. As such they won't be listed on your firm's "list and descriptions" nor will you have "compliant presentations" for them. However, these assets WILL be included in your firm's AUM (unless they're "advisory" (i.e., not legally discretionary) accounts.

    Hope this adds some clarity.

  3. The solution to to the handling of an account that is transitioning from one strategy to another is really quite straight-forward and does not rely on the this specious notion of an "administrative composite." While it is in transition, it should be restricted while it is reinvested in new securities. There is no reason to add it to a composite. This is similar to a new account that may have a grace period before becoming a member of one or more composites.

  4. Thanks for your note, Nancy. The admin composite in this case is merely a way to keep track of the account while it's in transition; the "admin composite" is not a GIPS composite, but simply a tracking tool. It is obviously totally optional and its presence or absence doesn't invalidate compliance.


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