Q & A Database
The GIPS Standards Q&A database contains questions and answers (Q&As) on various searchable topics that provide additional interpretation on an issue. Q&As are considered to be authoritative guidance and must be followed in order to claim compliance with the GIPS standards.
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ArchivedEffective: 1 December, 2013 - 31 December, 2019Categories: Cash FlowSource: GIPS Executive Committee
We calculate composite performance monthly, using the aggregate method. This method combines all of the assets and cash flows of the portfolios that are included in the composite for the month, and the composite return is calculated using the combined amounts, as if the composite were one portfolio. Because we use the aggregate return method, monthly portfolio-level returns are not used in the composite calculation. The GIPS standards state that for periods beginning on or after 1 January 2010, firms must value portfolios at the time of all large cash flows. May we create a large cash flow policy with large cash flows defined at only the composite level, or must we create a large cash flow policy at both a composite and portfolio level? If we create a large cash flow policy at both the composite and portfolio level, must the policy be the same for both?
For periods beginning on or after 1 January 2010, firms must create a large cash flow policy for each composite. The large cash flow policy must be created on a prospective basis, and must be consistently applied.
Firms calculating composite performance using the aggregate method must create a large cash flow policy at both the composite level and the portfolio level. The large cash flow policy does not have to be the same for both the composite and its portfolios.
For example, assume a firm’s policy is to revalue portfolios for external cash flows that exceed 10% of the portfolios beginning value. The firm must then determine how the valuation of one portfolio within the composite at the time of the portfolio’s large cash flow will impact the composite calculation. The firm could adopt a policy whereby the entire composite is valued if the cash flow that triggered the portfolio revaluation exceeds a certain monetary amount or a percentage of the composite’s assets. Another possible option would be for the firm to adopt a policy whereby the entire composite is valued if any portfolio within the composite is valued.
Although portfolio-level returns are not used when calculating composite-level returns under the aggregate method, portfolio-level returns are used when calculating the measure of dispersion of individual portfolio returns, a required disclosure in the compliant presentation.
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