What are the detailed rules for composite construction under GIPS?

Question

AcadiFi · Accepted Answer

Composite construction is central to GIPS integrity. A COMPOSITE is a group of discretionary portfolios managed to a similar investment strategy or objective.

KEY RULES:

1) ALL fee-paying, discretionary portfolios must be included in at least one composite. This prevents firms from hiding underperforming accounts.

2) Only ACTUAL client portfolios — no simulated, backtested, or model portfolios count.

3) Portfolios must be ASSIGNED BY STRATEGY, not arbitrarily. Firms must have a written composite definition.

4) NEW portfolios are added to composites on a TIMELY CONSISTENT basis, typically after a month or quarter. The firm's policy must be documented.

5) TERMINATED portfolios remain in the composite through the last full measurement period in which they were managed. You can't retroactively exclude losers.

6) NON-DISCRETIONARY portfolios are excluded, but discretionary status requires clear definition (e.g., client imposes binding constraints that materially affect strategy).

```mermaid
graph TD
    A[All Portfolios] --> B{Fee-Paying Discretionary?}
    B -->|Yes| C[Must be in Composite]
    B -->|No| D[Exclude]
    C --> E[By Strategy]
    C --> F[Terminated: Keep Last Period]
```

7) MINIMUM ASSET SIZE — firms may set a minimum below which portfolios are excluded, but the minimum must be disclosed and applied consistently.

8) SIGNIFICANT CASH FLOW policy allows temporary exclusion of portfolios with extreme flows that disrupt strategy execution — again, must be disclosed.

9) COMPOSITE DISPERSION (internal variation of returns) must be calculated and presented.

At Whitfield Investment Partners, the compliance team reconciles all 340 portfolios quarterly against composite definitions. Any portfolio that drifted from its assigned strategy is either moved to the correct composite or investigated for policy breaches.

For CFA exam, know: ALL fee-paying discretionary portfolios → composite; no cherry-picking; terminated accounts stay through last period.

What are the detailed rules for composite construction under GIPS?

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