Which of the following is/are required by AIMR-PPS with regards to creation and maintenance of composites?
I. All actual fee-paying discretionary portfolios must be segregated into one or more composites based on similar investment strategies.
II. Portfolios must not be switched from one composite to another unless documented changes in client guidelines make the switching appropriate.
III. Composites must include all terminated portfolios while calculating performance for periods prior to the termination.
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A. B. C. D.D
All actual fee-paying discretionary portfolios must be included in at least one composite based on similar investment strategy. Segregation of these accounts is not required. (II) and (III) are true.
The Association for Investment Management and Research - Performance Presentation Standards (AIMR-PPS), which has been superseded by the Global Investment Performance Standards (GIPS), provides guidelines for the creation and maintenance of composites, which are groups of investment portfolios with similar investment strategies. Let's go through each statement and determine whether it is required by AIMR-PPS:
I. All actual fee-paying discretionary portfolios must be segregated into one or more composites based on similar investment strategies. This statement is correct. According to AIMR-PPS, all actual fee-paying discretionary portfolios, which are portfolios where the investment manager has the authority to make investment decisions on behalf of the client, must be grouped into composites based on similar investment strategies. This ensures that the performance of portfolios with similar strategies is compared and evaluated together.
II. Portfolios must not be switched from one composite to another unless documented changes in client guidelines make the switching appropriate. This statement is also correct. AIMR-PPS requires that portfolios should not be switched from one composite to another without documented changes in client guidelines that justify the switching. This requirement ensures that portfolio performance is not manipulated by moving portfolios between composites arbitrarily. Changes in client guidelines could include changes in investment objectives or constraints that warrant a reclassification of the portfolio.
III. Composites must include all terminated portfolios while calculating performance for periods prior to the termination. This statement is incorrect. AIMR-PPS does not require that composites include terminated portfolios when calculating performance for periods prior to termination. Terminated portfolios are typically excluded from composites because including their past performance could distort the composite's performance calculations and make them less representative of the ongoing investment strategy.
Based on the above analysis, the correct answer is:
C. I and II only
Statement III is not required by AIMR-PPS.