It came to my attention yesterday that a new GIPS(R) (Global Investment Performance Standards) rule is being introduced into the GIPS Handbook regarding the treatment of significant cash flows (SCF): compliant firms will no longer be able to use the “number of portfolios” as a factor to employ the firm’s SCF policy.
Here’s what is being changed: Let’s say you have an SCF policy that you employ firm wide, that says if there’s a flow greater than 30%, you will remove the portfolio for one month. Great! BUT, you have a few small composites (small in number of portfolios) that could have “gaps” or breaks in performance if you ever employed the SCF rule here. And so, you want to condition your policy by having something like “if the composite has less than five accounts, the policy does not apply.” I.e., you’d rather suffer from the impact of the flow rather than experience a break in your performance history.
Or, what if you want a policy that says that composites with ten or more accounts have a 30% threshold, while composites with 5-10 have 40%, and below five will not participate in the SCF policy, so as to avoid possible breaks; what is the harm with such a policy?
This new rule will prohibit firms from doing this. Why? What’s the point? What is the harm with firms having such policies? I find the change unnecessary, but more important, the manner in which it is being done in total conflict with the traditional methods to introduce new rules. What happened to protocol?
I mentioned above that these new “rules” seem to conflict with language in the earlier version of the SGF guidance:
As you can see, the SCF guidance recognized that a firm could experience gaps if a composite had just a few accounts, and so it cautioned firms on applying the same rules across the firm, without any regard to the number of portfolios a composite might have. For an unknown reason, this wording was removed from the most recent version of this guidance. Are we now witnessing a total “180” regarding a firm’s ability to have rules partly conditioned on the number of portfolios in a composite? Why?
Since this is clearly a rule change, why isn’t there an effective date?
I find this frustrating, ridiculous, absurd, and senseless! What do you think?
By the way, firms can STILL accomplish having their policy sensitive to the number of portfolios in a composite; they will have to specifically identify those composites which will employ the SCF policy. It’s a little more cumbersome, perhaps, but can still be done. There is no requirement that firms must have a single SCF policy that must apply to all composites (at least not yet!).
Also, one might wonder what other new rules are being introduced this way; I guess we’ll find out soon.