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Practical Portfolio Performance Measurement and Attribution, Second Edition by Carl R. Bacon

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Appendix J
Treatment of Carve-outs Guidance Statement16
Revised Effective Date: 1 January 2006 Adoption Date: 4 March 2004 Effective Date: 1 June 2004 Retroactive Application: Not required Public Comment Period: Aug – Nov 2002

GUIDANCE STATEMENT ON THE TREATMENT OF CARVE-OUTS (REVISED)

Introduction

A carve-out is defined as a single or multiple asset class segment of a multiple asset class portfolio. It is used to create a track record for a narrower mandate from a portfolio managed to a broader mandate. For example, the Asian securities from a Euro-Pacific portfolio or the equity portion of a balanced portfolio could be considered a carve-out. Carve-outs are generally based on asset class, geographic region, or industry sector.

Inherent problems

Carve-outs have several problems associated with them. Because they represent only a portion of a broader, more diversified strategy, carve-out returns are only a valid track record if they are representative of what would have been achieved in a portfolio dedicated to the carved-out strategy. The use of carve-outs gives the impression that the firm has experience managing portfolios dedicated to a particular strategy, when this may not be the case. For example, a carve-out of the U.K. equities in a global equity portfolio that holds only two U.K. equities is not representative of a diversified U.K.-only portfolio.
A second problem occurs if cash is not accounted for separately and, therefore, must be allocated to the carved-out ...

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