Filling in the gaps of performance ... or not!

My son, Chris, and I had a preliminary meeting with someone who is looking to obtain compliance with the Global Investment Performance Standards (GIPS(R)). He left his prior firm and has recently created an account that is being managed in the same fashion as those he managed at the prior firm. The rules of portability apply. And so, he wishes to show a contiguous track record extending to performance he had at the prior firm.

The problem is that there is a two month gap between the time he stopped managing at the prior firm and began managing his new account. What can he do about it? Can he cross or fill in the gap?

Unfortunately, no; nothing can be done to link the two periods. He must show partial (aka "stub") period returns for the period leading up to the break (e.g., January-August, 2012) and the period since (e.g., November-December, 2012). The gap cannot be crossed.

Might he simulate the performance, by way of a benchmark's return, model performance, or backtesting? Nope!

I recognize that this is frustrating to those managers who have compiled a five or ten year track record, and wish to take advantage of and build upon it in their new endeavor. No doubt, they wish to report the return for the entire year they departed, as well as to link that year to prior and subsequent periods, so as to show rolling or fixed five and ten year cumulative and anualized returns. But when a gap occurs, it sadly cannot be crossed.

Individuals contemplating a departure from one firm to either start or join another, and who wish to continue their track record, must maintain at least one account in the same manner so as to avoid the creation of a gap. Of course, there are times when their departure is not of their own design but is forced upon them without notice. In these cases, nothing can be done. But, if someone anticipates a departure, willingly or otherwise, they can take steps to ensure their continuous and contiguous track record remains.

Have other thoughts? Please chime in!