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ArchivedEffective: 1 September, 2011 - 31 December, 2019Categories: Aggregate MethodSource: GIPS Executive Committee
We calculate portfolio and composite returns monthly. When calculating monthly composite returns, how do we reflect the performance of new portfolios that begin during the month and that were not managed for the entire month? Does your answer change if we use the aggregate method to calculate composite returns?
When calculating composite returns for a specific period, only portfolios that are included in the composite for the entire performance measurement period are included in the calculation. In this situation, when calculating monthly composite returns, only those portfolios that are managed on a discretionary basis for the full month are included in the composite return calculation. Portfolios that begin during the month, close during the month, or are otherwise determined to not qualify for inclusion in the composite for the full month, must not be included in the composite return calculation. The method used to calculate monthly composite returns does not have any impact on the population of portfolios that are included in the composite return calculation.
For example, assume Firm A maintains a Small Cap Value Composite. For the month of May 2011 Firm A manages 8 portfolios in this strategy at any point in time during the month. Only those portfolios managed for the full month, from May 1, 2011 through May 31, 2011, are included in the composite calculation. In this example, Portfolio 3 is not included in the composite calculation as it began on 5/14/11 and does not have a full month of performance. The same is true for Portfolio 8. It also does not have a full month of performance therefore it is not included in the May 2011 composite calculation. Portfolio 7, which terminated on 5/20/11 is not included in the calculation because it too does not have a full month of performance. Because the composite return is calculated monthly, only the five portfolios that have a full month of performance, from May 1, 2011 through May 31, 2011, are included in the composite return calculation for the month of May 2011.
Period managed in strategy
When calculating a monthly composite return and the performance measurement period is defined as a month, a firm must not include in the composite calculation portfolios that were not managed for the full month and, therefore, do not have a full month of performance. If a firm wishes to include in composite returns portfolios that do not have a full month of performance the firm must calculate composite returns more frequently than monthly, e.g., daily. Assuming a firm calculates composite returns daily, the firm would include in the daily composite return calculation only those portfolios that are managed for the full day. Firms must consistently follow their policies and procedures for calculating composite returns.