A client recently asked about dealing with “breaks” in performance. First, what IS a break? We’d define it as a temporary loss of discretion over a client’s assets, during which time no trading can be done. Breaks can be caused by changes in custodians as well as for other reasons. Another term for a “break” is a “gap.” I opined on this topic a few years ago in our newsletter, regarding the calculation of returns (that is, can you link across gaps for returns). The client’s question had to do with GIPS(R).

If you search the GIPS Q&A database you’ll only find one item dealing with this topic, and it doesn’t really address temporary breaks. I recall discussing this a few years back with a group and we couldn’t arrive at any clear consensus. Some thought ANY break meant that performance stops, while others felt that there should be an assessment as to whether or not there would likely have been any trading during the break: if not, then what’s the harm in linking across it?

I tend to be in the latter group’s camp: that is, when one has a break, they should determine the likelihood of trading occurring. If, for example, the manager is very much a buy-and-hold manager, who trades infrequently, then a gap of even a few weeks might not cause a problem. However, if the manager trades almost daily, then even a short break would be problematic.

Ideally, the manager has other similar accounts that they can compare the account-with-the-break to, to determine if there truly was an absence of trading. This is where the verifier can come in…to provide an additional degree of analysis.

It would be nice to see something formal regarding this topic, but for now there is little guidance. Hopefully mine won’t conflict with anything that comes in an official capacity.