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101 Concepts for the Level I Exam

Concept 101: Construction and Purpose of Composites

GIPS standards require the use of composites.

  • A composite is formed by grouping portfolios that represent a similar investment strategy, objective or mandate.

For example, if you are managing 100 accounts and one of your strategies is to invest in large cap value stocks, and you use this strategy for 70 accounts. Then these 70 accounts will form one composite. Similarly, if you have another strategy to invest in small cap growth stocks; and you use this strategy for the remaining 30 accounts. Then these 30 accounts will form another composite. You will have to report performances of these two composites separately.

  • A composite representing a particular strategy must include only fee-paying, discretionary portfolios that the firm has managed in accordance with this particular strategy.

For example, if you are managing funds for a charity organization and not charging them any fees, then this account should not be included because it is a non-fee paying account. Similarly, if you are managing an account for a large client, where you cannot use your discretion and the client tells you what securities to buy and sell. Then you should exclude this account because it is a non-discretionary account.

  • GIPS standards require that the criteria for classifying portfolios into composites are decided before the composite performance is known and not after the fact. This prevents firms from choosing only their best performing portfolios in the composite.

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