Effective 1 January 2010, GIPS (Global Investment Performance Standards) compliant firms are obligated to revalue their portfolios for large cash flows. A Q&A managed to get clear that this applies to firms that use the “aggregate method” to derive their composite returns, even though the fundamental portfolios aren’t found in this method to come up with the return.

However, I’d argue that it would be unacceptable to revalue composites themselves for large moves! I first addressed this inside our November 2006 newsletter, following a task I conducted for a unit of Bear Stearns (I’m comfortable talking about your client now, given their demise). The project involved a case where they grouped accounts together to give a client with a standard representation of their performance. Even though I later argued for the use of money-weighting in these cases (not for GIPS purposes, but for client reporting), I tackled the time-weighting position nevertheless. It appears that they replaced a prior method with one that revalued the collection (aka “composite”) when large flows occurred.

At first, I thought this was suitable probably; however, the results proved nonsensical, which caused me to reflect more about this. Simple case Pretty, right? We have a amalgamated that starts with an individual account, month by a second account which is joined up with half way through the. Should we revalue the composite because of the large flow? Well, if we do the effect will be 1.33 percent.

Does this make any sense? In the end, the two portfolios have earnings that both surpass this value, so how can this be right? AFTER I was presented with an example such as this from Bear, I had been initially perplexed, because I couldn’t see why the result would be so obviously wrong! If, however, we use an asset-weighted strategy that avoids revaluation, the result is the more plausible 3.33 percent!

  • A. Why do we not measure performance? We don’t have processes in place
  • Low levels of productivity? Yes
  • ► April (7) – ► Apr 28 (1)
  • November 4
  • Log in making use of your customer Id and password into the account
  • The aggregate funding rose three percent to 75% in 2013, from 72% in 2012
  • 2011 $35,947 $193.9
  • US project: WITHOUT RISK Rate +Beta* (Canada ERP) = 3% + 0.80 (5.37%) = 7.30%

I will leave it to the audience to either validate these results by yourself or to visit the earlier newsletter which provides the details. And so, how can we describe what’s taking place? Let’s revisit the reason why we revalue: to remove the impact of the money movement on the collection, in order to separate the timing and after the circulation event before. However, is the manager managing the composite? They’re managing two separate portfolios. To revalue the first collection just because a new you are introduced causes us to fully capture a point where the account had slipped in value: but what does this have to do with the next profile being added?

Firms that go to the trouble of revaluing composites for large moves are opening themselves to reporting erroneous results when they revalue for new accounts being added through the month. Granted, month most companies bring on new accounts at the start of a new, which means this wouldn’t be an issue, but for those that will bring a merchant account in mid-period, problems can arise and any result is an mistake arguably.

Should the firm revalue for flows apart from for new accounts? I’m not sure concerning this as it would require more thought on my part. But also for now, let’s say I’m unpleasant with the idea of revaluing an entire amalgamated because one of the accounts has an extremely large circulation: I don’t believe the result will always be accurate. I want to explain that the effect I obtained without revaluing was utilizing the asset-weighted method, not the aggregate method. I am discovering the impact of revaluing vs.