Performance Perspectives Blog

More on the aggregate method

by | Feb 16, 2012

Fear not!

I haven’t given up on my arguments against the use of the aggregate method to derive the extremely important composite returns (which are the bedrock of the Standards).

I was conducting a GIPS(R) verification earlier this week, and stumbled upon the following on page 6 of the 2010 edition of the Global Investment Performance Standards:

“The composite return
is the asset-weighted average
of the performance
of all portfolios in the composite.”
[emphasis added]

But, as I have pointed out repeatedly, this does not hold for the aggregate method, which calculates the return of the composite, which can yield a hugely different result. And so, IF this IS the definition, why allow the use of a formula that violates it? We have two measures which DO satisfy this definition, and should be the ONLY ones permitted.

Can I get an “amen” on this?

Now, in reality, I favor equal-weighting, but asset-weighting won’t go away. But we can at least adhere to the intended definition and calculate it properly, can’t we?

p.s., I learned this form of writing from reading NBA Hall of Famer Dennis Rodman‘s autobiography (yes, I read it).

p.p.s., Well, actually, Susan Weiner was my inspiration.

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