When grouping portfolios into composites, investment managers should assure that the constituent portfolios represent similar investment objectives or strategies. The way other firms characterize such portfolios should also be considered, as it can improve comparisons among managers.
Composites can be defined according to:
- Investment mandate (e.g. U.S. equities)
- Asset classes (e.g. fixed income)
- Style or strategy (small-cap value)
- Benchmarks (Russell 2000 growth)
- Risk-return profile (enhanced index)
Classifications by style or strategy, in particular, are both widely recognized and offer a meaningful level of distinction.
The procedures for including specific portfolios in a composite should be established, documented and applied consistently. New portfolios should be included as quickly as possible, such as at the beginning of the next full performance measurement period. When illiquid securities or other factors make this date unreasonable discretion may be required.
Portfolios should be included in a composite through the last full period in which they are under discretionary management. Portfolios should not be swapped between composites unless doing so is justified either by documented changes in the investment guidelines or by a redefinition of the composites.
If portfolios include multiple asset classes, portions may be carved out and allocated to separate composites only if cash is allocated to the carve-out returns in a timely and consistent manner. Beginning in January 2010, carve-outs will be allowed only if the components are actually managed separately, including maintaining their own cash balance.For more information, see all articles on: Investment Returns, Performance Measurement, Portfolio Management See also: