Those who were around “at the creation” recall the debates regarding whether composite returns should be equal- or asset-weighted. Two groups in particular, the ICAA (Investment Council Association of America; now the IAA) and IMCA (Investment Management Consultants’ Association), lobbied AIMR (Association for Investment Management and Research; what is now the CFA Institute) for equal-weighting. I’ll confess that at the time, I didn’t pay this a whole lot of attention, and didn’t formulate an opinion.
AIMR wanted the composite return to represent the experience of a “single account.” That is, what the return would be if the composite was an account itself. IMCA and the ICAA felt that asset-weighting might influence some managers to favor larger accounts, knowing that their returns would skew the results. And, I suspect that they also thought that equal-weighting made more sense as it shows the average return of actual accounts. But AIMR was steadfast (“resolute,” in “W” speak) in their position, and refused to budge. IMCA was so determined that they created their own standard, which went into effect the same time the AIMR-PPS(R) did: it never caught on, however.
The AIMR-PPS did, of course, catch on, and motivated other countries to develop standards, which led to the creation of the Global Investment Performance Standards (GIPS(R)). And as with the AIMR-PPS, asset-weighting because the required way to derive composite returns.
But why? What is the benefit of the composite looking like an account, when it isn’t one? The composite is comprised of one or more real accounts, that were managed individually; no one “managed” the composite. Would it not be better to see the average experience of real accounts?
When I conduct GIPS verifications I occassionally run across cases that SHOUT OUT to me that this is all wrong. Here’s one recent example:
