Wednesday, February 27, 2013

Account minimums: when to remove accounts, when to add them, to GIPS composites?

GIPS(R) (Global Investment Performance Standards) compliant firms routinely establish minimums for accounts to be included in composites. The minimum is the threshold, below which, the account is not representative of the strategy.

But when should an account that falls below the minimum be removed? Or, if it rises above, be added?

Many firms test only at the beginning of the period: if the account is above at the start of the month, it will be in the composite for the full month. But this can be problematic. For example, one of our verification clients had the following situation:

This particular composite has a $1 million minimum; clearly, the account is above at the start. BUT, at some point during the month, most of the assets left. Granted, if the firm has a significant cash flow policy, the account would be removed for that reason. But, if it doesn't, should it come out because it fell below the minimum? I would say, "yes!"

The test should be at the start and end of the period. If the account is above at the start and end, it should be in the composite, but if it is below at either the start or end, it should be excluded.


  1. Dear Dave, That is quite the example!

    I have a few questions and thoughts on how this account could be handled.

    1) Was the $5MM withdrawal a cash withdrawal?

    If so, I would potentially consider this account a temporary loss of discretion. Since, the portfolio manager had to manage this account differently to raise the cash necessary for the withdrawal. In which case, the account likely didn't benefit from any "new ideas" the portfolio manager may have had during this time. If this was the case, I'd say document it internally.

    2) Did they try to break the calculation down into sub-period "True Time Weighted Returns" and then geometrically link the returns?

    It would be more work, but it could mitigate "some" of the performance distortion.

    At the end of the day, I believe the key is to establish policies that are meaningful to your firm and the way you manage money, apply them consistently, and document document document.



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