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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Effective: 1 March, 2006 - 31 October, 2012

Categories: Carve-Outs

Source: GIPS Handbook, 2nd Edition

Our firm has a balanced portfolio with a defined asset allocation of 25% US equity, 25% non-US equity, and 50% fixed income. Although each segment is managed in the same way as a stand-alone portfolio managed to the segment’s strategy, we do not segregate the segments into separate portfolios with separate cash allocations. What is an acceptable method of allocating cash to the segments?

The Standards do not require a specified cash-allocation methodology. The firm must choose a method that allocates the cash in a timely and consistent manner, document it and apply it consistently.

One suggested methodology would be to allocate cash to each segment based on the beginning of period valuations: identify the cash allocation percentage for each portfolio segment at the beginning of the period. For example, at the beginning of January, identify the percentage of residual cash that will be allocated to the carve-outs at month end.
Or, if at the beginning of the measurement period, the market values for the segments, excluding residual cash, are 26%/23%/51%, residual cash in the portfolio will be allocated 26% to US equity, 23% to non-US Equity, and 51% to fixed income.

Another methodology would be to base the allocation directly upon the target strategic asset allocation: allocate residual cash in the percentages established when the portfolio was established. In the example provided above, residual cash will be allocated to rebalance the portfolio to 25% to US equity, 25% non-US equity, and 50% fixed income.

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