2020 GIPS® Standards – Use of Carve-Outs

August 1, 2019

Under the 2020 GIPS standards, firms are allowed to include carve-outs with allocated cash in composites. This is very positive news as firms often have a desire to demonstrate the performance of sub-strategies that are offered as standalone portfolios or components of multi-strategy portfolios. It is expected that a greater number of advisers, including private wealth managers and firms who manage private market investments, will find the options available to be more favorable than what was available under the 2010 GIPS standards.

A carve-out is a portion of a portfolio that is, by itself, representative of a distinct investment strategy. It may be used to create a track record from multi-strategy portfolios for a narrower mandate. It is common for a firm to manage several asset classes for a client and those assets will be held in one balanced/multiple asset class portfolio. Presenting the track record of these portfolios in one composite doesn’t always produce a meaningful representation of the firm’s track record since each portfolio often varies significantly.  Even when firms have created target asset allocation balanced/multiple asset class composites, the results of such composites do not always represent the strategy that is offered to a prospective client. This is because of the customization that is done for each portfolio to address the specific objectives and needs of the client. In these situations, the construction of carve-out composites is much simpler, more intuitive, and can provide more meaningful information to prospective clients than a composite that represents the combined performance of a mix of blended portfolios with diverse components and allocations.

Under the new guidance, firms will be able to present the performance of a specific asset class and create a meaningful track record that is representative of an investment strategy that the firm offers. Types of carve-outs other than those based strictly on asset class could include specific sectors, industries, market cap size ranges or style types. The 2020 edition of the GIPS standards provides guidance on calculation, presentation and reporting carve-out composite performance.  We are working with a number of clients to implement these requirements.