AIMR wanted the composite return to represent the experience of a "single account." That is, what the return would be if the composite was an account itself. IMCA and the ICAA felt that asset-weighting might influence some managers to favor larger accounts, knowing that their returns would skew the results. And, I suspect that they also thought that equal-weighting made more sense as it shows the average return of actual accounts. But AIMR was steadfast ("resolute," in "W" speak) in their position, and refused to budge. IMCA was so determined that they created their own standard, which went into effect the same time the AIMR-PPS(R) did: it never caught on, however.
The AIMR-PPS did, of course, catch on, and motivated other countries to develop standards, which led to the creation of the Global Investment Performance Standards (GIPS(R)). And as with the AIMR-PPS, asset-weighting because the required way to derive composite returns.
But why? What is the benefit of the composite looking like an account, when it isn't one? The composite is comprised of one or more real accounts, that were managed individually; no one "managed" the composite. Would it not be better to see the average experience of real accounts?
When I conduct GIPS verifications I occassionally run across cases that SHOUT OUT to me that this is all wrong. Here's one recent example:
Because of the huge size difference, account A's return IS the composite's: account B doesn't even have to show up. What's the point of worrying about B? It has zero influence on the return. And yet, the manager's ACTUAL performance in this discipline lies between these two accounts: actually RIGHT IN THE MIDDLE of them (what mathematicians and statisticians call, the average)!
Okay, so the Standards recommend that firms show the equal-weighted composite return. Great! How many firms do? The number is approximately zero. And why not? Perhaps it's because they would prefer not to hand out their presentations on legal size (i.e., 8 1/2" x 14") paper, or resort to a 9 or 10 point font size to fit everything that's required on the page.
I know that this commentary is about as welcome to some as ants at a picnic. But seriously, what were they thinking when they advocated asset-weighting? NO ONE MANAGES COMPOSITES! Firms don't get paid TO MANAGE A COMPOSITE! Would it really be so bad to say, "okay, maybe equal-weighting makes more sense, so effective 1 January 2015, equal-weighting will be mandatory, asset-weighting is optional, and the change goes into effect on this date, but firms are encouraged to restate history"? And what's the likelihood of this occurring? Again, approximately zero. Oh, well.
p.s., Yes, the figures in the table come from a client, though they've been altered slightly, out of respect for our client's confidentiality.