Getting Year-End Assets Right

It’s time for calendar year updates to assets under management.  Three questions from the attendees at the GIPS conference are worth a little extra attention when updating your GIPS reports with year-end composite assets.

Q. Our performance system requires us to include accounts in a composite on the day prior to the first month – e.g. we have to include an account as of 12/31 for it to be included in the composite for January. We included these accounts in composite assets as of 12/31. Is this an error?

A. This would be an error. Accounts should not be included in composite assets until they are included in the composite (1/1) for the performance period. Depending on the accounting system there are different ways to ensure that these accounts are not included in the assets of the month prior. These assets should always be included in 12/31 firmwide AUM regardless of composite inclusion.

Q. Timing – Daily vs Monthly vs Quarterly

If portfolio returns and composite returns are calculated daily, does the “full month” rule still apply since the portfolio weights in the composite are weighted on a daily basis instead of monthly?

What about inclusion of portfolios into the composite intra-month if composite return is calculated daily? 

A. There is no full month rule in the GIPS Standards. Accounts must be consistently included and excluded from the composite in a timely matter. For many firms, monthly is the default option because performance is not calculated daily. If account and composite performance is calculated daily, account inclusion/exclusion can be applied daily. Applying a daily policy can lead to a lot more composite maintenance, depending on the system. If account inclusion/exclusion is applied daily then the 12/31 composite AUM would only include the accounts that were in the composite as of close of business on 12/31.

Q. 3.A.9 Terminated ports must be included in the historical performance of the composite up to the last full measurement period that each port was under management…2.A.35 Composite TWRs except private market investment composites must be calculated at least monthly. Can a firm remove ports on quarterly basis?

A. Yes, a firm can have a quarterly composite exclusion policy. The most common policy is monthly.  Although, firms are allowed to define how they apply “full measurement period” for inclusion/exclusion of accounts, they should have a reasonable basis for their policy.  If accounts need a ramp up period for inclusion in the composites at the beginning of the first full quarter, managing excluded accounts as of the last full quarter makes sense, but isn’t ideal.  The reverse?  If a firm can include new accounts monthly, a policy to exclude terminated accounts quarterly isn’t reasonable.   If a firm reports monthly performance to databases or prepares interim updates to quarterly reports, it can be problematic to have an account included for the first two months of the quarter, and then removed back to the prior quarter-end if it terminates in the third month.  If the composite has hundreds of accounts, a quarterly exclusion policy would probably not significantly affect performance, though a quarterly exclusion policy could lead to a larger impact on performance for composites with a low number of accounts.