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 January, 2007 - 30 November, 2013

Categories: Cash Flow

Source: North American Investment Performance Council

Our firm created composites in 1995. As part of our composite construction policy, portfolios with an external cash flow during the current performance measurement period of 15% or greater (calculated as of the previous performance measurement period’s portfolio ending market value) would be removed from the composite. The composite construction policy also stated that portfolios which were removed from a composite due to a cash flow would be placed back in the composite at the beginning of the performance measurement period following a 45-day investment period. We have claimed compliance with the AIMR-PPS standards since 1996. Does this policy comply with the AIMR-PPS standards?

No, for part of the time cited, implementing the above policy was prohibited by the AIMR-PPS standards. It should be noted that this answer does not address the situation where a firm has a minimum account size policy for a composite and, due to a cash flow, a portfolio falls below the minimum.

In January 1996, the AIMR-PPS Implementation Committee issued a question and answer in the January – February 1996 edition of the AIMR Standards Reporter clarifying its position that removing portfolios due to large cash flows was not permitted.

In 2001, the AMR-PPS standards became a Country Version of the GIPS standards, meaning that the AIMR-PPS standards automatically incorporated future developments to the GIPS standards. The Guidance Statement on the Treatment of Significant Cash Flows, adopted 13 March 2002 and effective 30 June 2002, allowed portfolios with significant cash flows to be excluded from composites, provided specified criteria were met. The Guidance Statement is available at the www.cfainstitute.org website.

Consequently, for the period from January 1996 to June 2002 removing portfolios from composites due to large cash flows was not permitted under the AIMR-PPS standards (i.e., firms could not use cash flows as a criterion to define portfolios as temporarily non-discretionary). However, a firm has always been permitted to show, as supplemental information, a performance track record excluding portfolios with large cash flows.
Firms currently coming into compliance with the GIPS standards should rely on the Guidance Statement on the Treatment of Significant Cash Flows and not on previously-issued AIMR-PPS standards guidance when claiming compliance with the GIPS standards.