Investment Management
AUGUST 2002
AIMR Investment Performance Guidance
Statement On the Treatment of Cash Flows
By: Michael S. Caccese*
The Association for Investment Management and Research
Significant Cash Flows
(“AIMR”) recently adopted investment performance
guidelines for the treatment of cash flows (the “Guidelines”).
Under the Guidelines, a firm may exclude portfolios from
composites if subject to significant cash flows. The
The Guidelines provide clarification to the AIMR Global
Investment Performance Standards (“GIPS”) and the country
significance of cash flows must be defined by a firm on a
composite-by-composite basis, taking into account
versions of GIPS, including the AIMR Performance
Presentation Standards (“AIMR-PPS”), relating to when an
characteristics such as asset market liquidity, market volatility
and/or the trading capabilities of the manager. “Significance”
investment manager can remove a portfolio from a composite
due to significant cash flows.
must be defined either as a specific dollar amount or
percentage of portfolio assets. The Guidelines provide that
Under GIPS and AIMR-PPS, a firm must include, on a timely
liquidity of the asset class is an important factor when
considering the impact of cash flows on a portfolio and the
and consistent basis, all new portfolios that it manages in an
appropriate composite. GIPS and AIMR-PPS allows for a
grace period for the inclusion of new portfolios in a
composite to allow the firm to fully develop its investment
strategy with respect to the portfolio. The Guidelines allow
for a firm to exclude existing portfolios that experience
significant inflows or outflows of cash for similar reasons.
CASH FLOW DEFINITION
overall composite. A significant cash flow, to or from a
smaller portfolio, may not directly impact the composite
performance. However, it may dramatically affect the
portfolio performance, which could ultimately distort the
composite’s dispersion.
Removal of Portfolios with Significant Cash Flows
Under the Guidelines, firms are permitted to temporarily
The Guidelines define “cash flow” as an external flow of cash
remove portfolios from composites at the beginning of the
reporting period if the firm believes that significant cash flows
and/or securities (capital additions or withdrawals) that is
client initiated. Firms may aggregate cash flows or identify a
can disrupt the implementation of the investment style and
strategy of the portfolio; subject to specified criteria. Below
single occurrence of cash flow for purposes of excluding
portfolios from a composite. However, a firm should
are some guidelines relating to cash flow policies that must be
established and documented for each composite prior to
consider whether it maintains investment discretion as defined
by GIPS and AIMR-PPS if the portfolio experiences multiple
implementation:
cash flows over an extended period of time.
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firms define its grace period for the exclusion of new
portfolios on either a firm-wide or composite-specific
basis and may not apply these policies or any changes
retroactively;
* Michael Caccese is a partner in the Boston Office of Kirkpatrick & Lockhart LLP. He works extensively with investment firms on
compliance issues, including the AIMR-PPS and GIPS. He was previously the General Counsel to AIMR and was responsible for overseeing
the development of AIMR-PPS, GIPS and other standards governing the investment management profession and investment firms. He can
be reached at 617.261.3133 and mcaccese@kl.com.
Kirkpatrick & Lockhart LLP
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composite-specific policies should be established upon
Further, firms must disclose upon request the number of
composite creation;
times portfolios were removed during a given period, the
number of portfolios removed and the amount of assets
firms are required to include the temporarily excluded
portfolios back in the composites once the pre-defined
represented by the portfolios affected by the application of
the firm’s policies.
grace period has elapsed;
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firms must consistently apply its policies; and
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firms may not remove portfolios from a composite on an
TEMPORARY NEW ACCOUNTS AND MANDATORY FUTURE COMPLIANCE
ex-post basis due to performance-based reasons.
Under the Guidelines, when a portfolio is excluded from a
Removed portfolios must be returned to the composite
consistent with the firm’s policy governing the inclusion of
composite according to a firm’s cash flow policies, the firm
may treat the excluded portfolio as a temporary “new”
new accounts in a composite.
account for purposes of GIPS. For instance, when a
significant cash flow is withdrawn from a portfolio, a firm
Removal of a portfolio will not affect the particular
portfolio’s performance history. However, if all of a
composite’s portfolios were removed during one or more
period, there would be a break in the composite performance
record. Any future continuation of the composite cannot be
linked to the past performance record of that composite.
Thus, firms that maintain composites with few portfolios
should consider applying a higher measurement criteria to
their definition of significant cash flows to avoid a break in a
composite’s historical performance record.
DOCUMENTATION
To comply with GIPS and AIMR-PPS standards’ record
keeping requirements, firms must keep records of all of their
existing and amended cash flow policies, including cash flow
definitions. A firm must document each time a portfolio is
included and excluded from a composite, including the date,
may create a new account to liquidate and distribute the funds
to the client. Such new accounts are treated as “new”
accounts under GIPS and AIMR-PPS standards and are
subject to the new portfolio grace period. Thus, in this
instance, firms do not have to include such accounts in a
composite. The Guidelines claim that the use of temporary
new accounts remains the most direct method for dealing with
significant cash flows. However, due to technological
deficiencies, all firms may not have the capabilities to create
these temporary new accounts. The Guidelines anticipate
that AIMR will adopt a requirement that creating a
temporary new account will be the sole methodology to treat
significant cash flows beginning January 1, 2010.
EFFECTIVE DATE
The required treatment of cash flows were effective June 30,
amount of cash flow (dollar amount as well as a percentage of
the most recent portfolio market value), and whether the cash
2002 and may not be retroactively applied. Investment firms
claiming GIPS and AIMR-PPS compliance should review
flow is a contribution or withdrawal.
their investment practices to determine whether significant
cash flows distort the firm’s investment style. If it does, or
DISCLOSURES
Each composite presentation must make the following
may in the future, the firm should comply with the
requirements of the Guidelines, including adding the required
disclosures when a portfolio is excluded pursuant to the
firm’s cash flow policies:
disclosures to the firm’s GIPS and AIMR-PPS presentations
and maintain the required records.
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If you would like to discuss the proposed Guidelines, or any
other issues relating to your AIMR-PPS compliance, please
how the firm defines a “significant cash flow” for that
composite;
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the grace period for the composite;
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if the cash flow policies and/or definitions have been
contact Michael S. Caccese at 617.261-3133 or
mcaccese@kl.com or your primary K&L contact.
amended; and
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that additional information about the firm’s cash flow
policies is available upon request.
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This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein
should not be used or relied upon in regard to any particular facts or circumstances without first consulting with a lawyer.
© 2002 KIRKPATRICK & LOCKHART LLP. ALL RIGHTS RESERVED.