In 1993, while attending a conference on the AIMR-PPS(R) standards, a speaker made the statement that virtually all compliant firms would have “turkey composites.” I was a bit dumbfounded by this, because at the time I didn’t know what a “turkey composite” was. Well, I came to learn that it meant a “catch-all” composite: that is, a composite where firms could stash all those accounts that just didn’t seem to fit anywhere else. This concept made no sense to me, since composites are supposed to comprise accounts with similar investment styles; not be a place for misfits. Eventually, AIMR announced that such composites weren’t permitted.

That’s all well and good, but the reality is that there are still firms that use them, even though GIPS(R) (Global Investment Performance Standards) also disallows them. This week we learned of an asset manager that has such a composite, even though they’re verified! But we know that this particular verifier has a “soft spot” for such things, and apparently doesn’t mind if their clients want to avail themselves of them. Interestingly, this asset manager actually knows themselves that they’re not permitted, but still has one.(The SEC, of course, may have a different opinion than this firm’s verifier, but that is an entirely different matter).

But what does this actually mean? Well, in a nutshell it means that the firm isn’t actually compliant, because having such a composite invalidates their claim.

Yes, these composites are a nice tool to put those accounts that just don’t seem to fit anywhere else; and yes, they save on having lots of small composites, but unfortunately, they’re not allowed. But clearly that isn’t stopping firms from still using them.