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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Archived

Effective: 1 November, 2012 - 31 December, 2019

Categories: Composite Construction

Source: GIPS Handbook, 3rd Edition

Firm XYZ has one Eurozone fixed income composite that contains the following three portfolios:

Portfolio 1 – a fund that is invested in Eurozone bonds with net assets of €20 million,
Portfolio 2 – a second fund that is invested in Eurozone bonds of several countries of the Eurozone with net assets of €30 million, and
Portfolio 3 – a private portfolio invested entirely in the two funds already mentioned. Net assets of this portfolio are €10 million.

These three portfolios are the only portfolios within Firm XYZ.

What is the correct number of portfolios in the Eurozone fixed income composite?
What is the correct amount of composite assets in the Eurozone fixed income composite?
What is the correct amount of total firm assets in Firm XYZ?

The question is that of eliminating the double counting of assets. Is it correct to present the Eurozone fixed income composite asset level as €60 million, and total firm assets as €60 million, or would that be misleading?

The GIPS standards are based on the principles of fair representation and full disclosure. Double-counting assets does not fairly represent total firm assets and is prohibited. The Eurozone fixed income composite described above would have three portfolios in the composite, with composite assets of €50 million (€20 million + €30 million = €50 million or €20 million + €30 million + €10 million – €10 million = €50 million). Presenting composite assets of €60 million – thus including €10 million from Portfolio 3, which is invested entirely in Portfolio 1 and Portfolio 2 – is misleading, and those assets would also be considered double-counted. The correct amount of total firm assets for Firm XYZ is also €50 million because the only composite in Firm XYZ is the Eurozone fixed income composite and the portfolios above are the only portfolios within the firm.

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