How does a firm define composites under GIPS?

Question

AcadiFi · Accepted Answer

Under GIPS, composites must be defined according to INVESTMENT MANDATE, OBJECTIVE, OR STRATEGY. The firm exercises professional judgment but must apply definitions consistently, document the process, and create composites representing all actual strategies — not just those with favorable track records.

**Defining criteria may include:**
- Asset class (equity, fixed income, balanced, alternatives)
- Investment style (growth, value, core, GARP)
- Capitalization focus (large-cap, mid-cap, small-cap)
- Geographic focus (US, EAFE, emerging markets, global)
- Benchmark
- Risk/return characteristics (target tracking error, beta)
- Presence of derivatives, leverage, shorting
- Client type (institutional vs retail), tax status (when materially different)

**Key requirements:**
1. Every actual discretionary fee-paying portfolio must belong to AT LEAST ONE composite
2. Definitions must be applied consistently over time
3. All composites MUST be included in firm's list of composites (even terminated) and provided to prospects on request
4. Composite creation date (when the composite was first created) and composite inception date (earliest return) must be disclosed

Example: Bellhaven Investment Management defines composites as:
1. Bellhaven US Large-Cap Value (Russell 1000 Value benchmark, no leverage)
2. Bellhaven US Mid-Cap Core (Russell Midcap, may hold up to 5% cash)
3. Bellhaven Global Fixed Income Unconstrained (flexible duration, uses derivatives)
4. Bellhaven Multi-Asset Balanced (60/40 strategic allocation)

When Bellhaven launches a new 'Sustainable US Equity' mandate in Q3 2026, it creates a new composite, discloses creation date, and begins tracking from first funded account's first full period.

```mermaid
flowchart LR
  A[Firm strategies] --> B[Define by mandate]
  B --> C[Document criteria]
  C --> D[Assign portfolios]
  D --> E[List all composites]
  E --> F[Provide to prospects]
```

Firms cannot create composites AFTER good performance is observed to capture only winners. The process must be forward-looking and neutral.

How does a firm define composites under GIPS?

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