An article I wrote for the CFA/CIPM newsletter was recently published on large cash flows. Recall that the Global Investment Performance Standards (GIPS(R)) now require firms to revalue portfolios for large flows. The article shows that this change may not be as trivial as you might think.
The real challenge occurs when you have two or more flows in a month. Let’s say that your definition of large is 10%, and that you begin the month with $100,000. On the 5th your client deposits $50,000, which is clearly large, so you revalue and the portfolio is now worth $155,000. Then, on the 12th the client adds $15,000: is this large? Well, if we compare it with $100,000 it is, but shouldn’t we compare it with the most recent valuation.
Or, let’s say you begin with $100,000 and the client withdraws $50,000 on the 5th, which results in the portfolio being valued at $53,000. On the 20th the client adds $8,000…is this large? Not in comparison to $100,000, but definitely when we compare it to $53,000!
My recommendation: compare versus your most recent valuation date.
A client recently asked “can we net the flows to determine if we need to revalue,” and I would say “yes!” This is a bit more complicated, but if you started with $100,000 and on the 5th they added $5,000 and then on the 6th $6,000, revaluation can be justified. You should document how you handle this in your policies and procedures.