• External cash flows must be treated in a manner consistent with the firm’s
documented composite-specific policy.
•
For periods beginning on or after 1 January 2001, firms must calculate portfolio returns at least monthly. For periods prior to 2001, portfolio returns must be
calculated at least quarterly.
• Periodic and sub-period returns must be geometrically linked.
Calculation Principles for Composites
The following are guiding principles that firms must use when calculating composite
returns:
• Composite returns must be calculated by asset-weighting the individual portfolio
of-period values and external cash flows.
• The aggregate return method, which combines all the composite assets and cash
flows to calculate composite performance as if the composite were one portfolio,
is acceptable as an asset-weighted approach.
•
For periods beginning on or after 1 January 2006 and prior to 1 January 2010, firms must calculate composite returns by asset-weighting the individual portfolio
returns
at least qu
arterl
y
. For periods beginning on or after 1 January 2010, composite returns must be calculated by asset-weighting the individual portfolio
returns at least monthly.
• Periodic and sub-period returns must be geometrically linked.
Cash Flow Principles
The following are guiding principles that firms must consider when defining their
composite-specific cash flow policies:
• An external cash flow is a flow of capital (cash or investments) that enters or exits
a portfolio, which is generally client driven. When calculating approximated rates
of return, where the calculation methodology requires an adjustment for the daily-
weighting of cash flows, the formula reflects a weight for each external cash flow.
The cash flow weight is determined by the amount of time the cash flow is held in
the portfolio.
• When calculating a more accurate time-weighted return, a large cash flow must
be defined by each firm for each composite to determine when the portfolios in
that composite are to be valued for performance calculations. It is the level at
which the firm determines that an external cash flow may distort performance if
the portfolio is not valued. Firms must define the amount in terms of
the value of the cash/asset flow or in terms of a percentage of the portfolio assets or the
composite assets. The large cash flow determines when a portfolio is to be valued
for performance calculations.
• A large cash flow is differentiated from a significant cash flow, which occurs in
situations where the firm determines that a client-directed external cash flow may
temporarily prevent the firm from implementing the composite strategy and the
portfolio is temporarily removed from the composite or the external cash flow is
placed in a temporary new account. Please see the Guidance Statement on the
Treatment of Significant Cash Flows, which details the procedures and criteria