The concept of “spinning” is often associated with politics and the news: that is, how one spins a story, so as to alter its appearance or focus. Spinning thus is often seen in a negative light, as it may appear to be a trick to present something differently to better suit the presenter’s goals or intentions.
There are times when working with GIPS(R) (Global Investment Performance Standards) verification clients when we spin something, in order to meet the client’s goals or objectives. I don’t see this as a negative; rather, I see it as taking advantage of some of the flexibility that’s inherent with the Standards.
The Standards cannot address every single issue that can arise; and so, we have to look at the rules and determine how best to handle what we’re presented with.
One client told me they wanted to raise a composite’s minimum, to reduce the dispersion that often appears. It turns out that the dispersion occurs chiefly because of smaller accounts, that are more sensitive to cash flows. Another issue with smaller accounts is that they occasionally have odd (not round) lots, which often mean higher transaction costs.
An important point to make before I continue: the firm does not market to these smaller accounts; their threshold for marketing is actually much higher than their current or proposed minimum.
Is the firm able to execute the composite’s strategy for accounts below the proposed new minimum? I.e., for these “smaller accounts”? The answer is, “yes,” which would, at least at first blush, suggest that they can’t raise the minimum.
Let’s consider spinning this a bit. Since these smaller accounts are (a) susceptible to being influenced by cash flows and (b) incur higher transaction costs, is it reasonable to say that they are therefore not representative of the composite? That is, would the firm consider using one of these accounts as the “representative portfolio” for the composite? The answer: “no.”
Therefore, I think it is reasonable to adjust their minimum. The smaller accounts exhibit returns that are not like those of larger accounts, and the firm does not market to accounts at or near this level.
Did we use some “spinning”? I think so. But, I think it is reasonable. Spinning is not necessarily a bad thing. It simply means that we alter how we look at a situation. We can do it with GIPS, other aspects of performance, and much more.