Investment Management
AUGUST 2002
Proposed AIMR Investment Performance Guidance
Statement On the Treatment of Carve-Outs
By: Michael S. Caccese*
The Association for Investment Management and
Research (“AIMR”) recently proposed investment
performance guidelines for the treatment of carve-outs
(the “Guidelines”). The proposed Guidelines provide a
clarification on the treatment of carve-outs in relation to
the AIMR Global Investment Performance Standards
(“GIPS”) and the country versions of GIPS, including
the AIMR Performance Presentation Standards
(“AIMR-PPS”). AIMR defines a carve-out as a sub-set
of a portfolio’s assets used to create a track record for a
narrower investment mandate from a portfolio managed
to a broader mandate. Carve-outs are generally based
on asset class, geographic region or industry sector.
The GIPS Standards state that commencing January 1,
2005, carve-outs can only be used if they are managed
separately within their own cash allocation. The
Guidelines clarify the appropriate treatment of carveouts before and after January 1, 2005. Comments on the
proposed Guidelines should be received by AIMR no
later than September 15, 2002.
only be a small portion of a large composite and of the
firm’s expertise. Second, carve-outs may not account
for cash separately and, thus, must be allocated to the
carved-out segment causing the calculation of the
performance return to potentially be less accurate. GIPS
and AIMR-PPS standards require that returns from cash
held in the portfolio must be included in the total return.
By not treating a carve-out as a stand-alone portfolio,
there will be no cash associated with the returns for that
sub-set and, thus, may not accurately represent the
actual management of a client’s portfolio. The
Guidelines intend to treat any carve-out used as a track
record as representative of an actual segregated
portfolio managed to that strategy. According to the
Guidelines, a firm is required to structure the carve-out
materially the same as the overall portfolio, with a
substantially similar risk profile to determine if the
carved-out segment is representative of a separately
managed portfolio with the same strategy.
CARVE-OUT MANDATORY REQUIREMENTS
OVERVIEW
AIMR believes that there are several inherent problems
with the use of carve-outs. First, the use of carve-outs
gives the impression that the investment management
firm has experience managing portfolios dedicated to a
particular strategy, where a carved-out strategy may
The Guidelines set forth the following requirements that
firms must meet in order to comply with GIPS Standards
with respect to carve-outs both prior to and after
January 1, 2005.
* 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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the carve-out should (must starting January 1, 2005)
be managed separately;
the carve-out must be representative of a standalone portfolio managed to the same strategy;
multiple cash accounts, where each segment’s cash is
accounted for separately.
The Guidelines set forth acceptable uses for carve-outs
which include:
for a carve-out of a particular strategy all similar
portfolio segments managed to that strategy should
(must starting January 1, 2005) also be carved-out
and included in the composite;
fees representative of the fees charged for a
separately managed portfolio for the assets carvedout must be allocated to the carve-out when
presenting net-of-fees returns; and
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the cash allocation method used must be disclosed.
CARVE-OUTS PRE-2005
Prior to January 1, 2005, the carve-out should have its
cash accounted for separately applying a consistent,
objective methodology using cash allocation methods
on an ex-ante basis.
If the segment does not have its own cash, cash must
be allocated to the segment according to one of the
following allocation methods: (i) Beginning of Period
Allocation, where a firm must identify the cash
allocation percentage for each portfolio segment at the
beginning of the period; or (ii) Strategic Asset
Allocation, where a firm bases the allocation directly
upon the target strategic asset allocation by using the
difference between the target percentage and the actual
percentage of investment (40% target with a 35% actual
investment equals 5% cash). Firms must disclose which
allocation strategy was used in creating the carve-out.
CARVE-OUTS POST-2004
Commencing January 1, 2005, the carve-out must have
its own cash using three possible methods for properly
accounting for the cash positions: (i) sub-portfolios,
where each segment of a portfolio is accounted for as if
it were a separate portfolio; (ii) separate portfolios,
where cash and securities are actually segregated into a
separate physical portfolio at the custodian; and (iii)
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carve-outs existing prior to January 1, 2005 need not
be separately managed going forward – the history
of those existing carve-outs must not change;
firms are not permitted to combine different carveouts or composites to create a new, simulated
strategy composite unless it is for purposes of
compliance with GIPS Standards; any hypothetical
composite created from existing accounts may be
presented as supplemental information and not
linked to actual composite returns; and
firms must disclose the underlying composites of
which the carve-outs are members and the
percentage for the current reporting period of each
composite that is composed of carve-outs; prior
periods must be made available upon client request.
EFFECTIVE DATE
Guidelines are effective January 1, 2003 and earlier
compliance is encouraged. The Guidelines set forth the
requirements of how an investment firm must treat
carve-outs for the purposes of complying with the GIPS
and AIMR-PPS standards. Investment firms claiming
GIPS or AIMR-PPS compliance should carefully review
the proposed Guidelines, and keep apprised of the
Guidelines as they are finalized.
If you would like to discuss the proposed Guidelines, or
any other issues relating to your AIMR-PPS
compliance, please contact Michael S. Caccese at
617.261-3133 or mcaccese@kl.com or your primary K&L
contact.
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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.