What is a “balanced manager”? Arguably, they’re a manager who (a) claims some expertise in managing two or more asset classes (e.g., stocks and bonds) and (b) has an ability to adjust allocations across these asset classes. Well, what if the manager doesn’t control the allocation? What if it’s the client who dictates the allocation? In these cases one might argue that the manager isn’t actually a “balanced” manager, but rather a stock and bond manager.

I base this statement partly on a perhaps long forgotten document titled “Answers to Common Questions About AIMR’s Performance Presentation Standards,” dated September 1992 and published by the Association for Investment Management and Research (what is called the CFA Institute today). Here we find the following:

• Question: “If the client dictates the asset allocation in a balanced portfolio – e.g., 40% equities, 60% fixed income – how should the portfolio returns be reported?”
• Answer: “If the client dictates the mix, then this portfolio is not a balanced portfolio, because the manager does not have any discretion over asset allocation, which is a main component of return for this strategy. The Standards recommend that these segment returns be included in equity-only and fixed-income-only composites, with cash accurately allocated.”

I should mention that with much of what we do, not everyone agrees with this statement. Many situations involve a client who provides the manager with a range, where the manager has discretion to allocate within certain boundaries. But even here, one might argue that the client has taken responsibility for allocation.

The bottom line is that firms can approach these situations in a manner they feel most appropriate. Some firms will treat these accounts as “balanced,” although they aren’t the one who is “calling the shots” on the allocation; others will declare them separate asset classes that need to be composited within their respective asset class specific composite.

We began working with a new verification client who has a massive amount of high net worth clients who in all cases dictate the allocation: I suggested to them that they don’t have to create a multitude of composites that cover all such ranges. Ideally, they should “carve out” the equity and fixed income pieces and put them into their appropriate composites. However, this ability has been made more challenging with the January 1, 2010 requirement that cash be maintained separately. Alternatively, the firm could declare the accounts as being “non-discretionary” (for GIPS(R) (Global Investment Performance Standards) purposes) since, as the AIMR document clearly states, the allocation drives a “main component of return.”