Thursday, March 31, 2011

When is income not income?

Simple answer: when you didn't create it. That is, when you're not responsible for it being here.

I conducted a GIPS(R) (Global Investment Performance Standards) verification for an asset manager whose clients get income from stock lending. The option to engage in stock lending is one that the client enters into with their custodian; the manager typically has no involvement at all, other than to purchase securities which someone wants to short, which therefore necessitates the borrowing of shares and the receipt of income.

Therefore, this income should not be recorded as interest income (which would benefit the manager for something they aren't responsible for) but rather should be treated as a cash flow. Sorry :-(


  1. I agree with this position - to a point. From a manager's perspective, the organization is absolutely not entitled to the benefits from income for which it has no direction or "ownership".

    The client, however, should strive to benefit from this income, and all other sources like it. The performance they represent at the plan or manager level to their stakeholders would include a sidecar calculation that reflects all income and expenses associated with the portfolio(s).

  2. Excellent poinnt, An (short for Anonymous); but then we would (should) be talking about returns using money-weighting, since we want to reflect how the CLIENT has done, not the manager.


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