Practical Portfolio Performance Measurement and Attribution, Second Edition

Appendix K

Significant Cash Flow Guidance Statement¹⁷

Revised Effective Date: 1 January 2006 Adoption Date: 13 March 2002 Effective Date: 30 June 2002 Retroactive Application: see “Effective Date” section Public Comment Period: Jul-Oct 2001

GUIDANCE ON THE TREATMENT OF SIGNIFICANT CASH FLOWS (REVISED)

Introduction

Dealing with large external cash flows in a portfolio is a common struggle for most investment managers. These large flows, of cash and/or securities, can make a significant impact on investment strategy implementation and, thus, on a portfolio’s and composite’s performance. Accordingly, this Guidance Statement clarifies the issues related to the treatment of significant cash flows under the Global Investment Performance Standards (GIPS^®).

Background

GIPS provision II.3.A.3 requires that composites must include new portfolios on a timely and consistent basis after the portfolio comes under management unless specifically mandated by the client (e.g. a client mandates a schedule of initial cash flows over several time periods and can prolong the length of time needed to implement the strategy). GIPS provision 3.A.4 states that terminated portfolios must be included in the historical returns of the appropriate composites up to the last full measurement period that the portfolio was under management.

The GIPS standards were developed with the understanding that new portfolios may require a period of time (a “grace period”) for a firm to fully implement the intended ...