GIPS: "in transition" assets

Recently I received a question from one of our verification clients regarding what I call "in transition" assets - basically accounts that are in the process of moving from one category to another with respect to the firm's GIPS compliant performance presentations. In answering, I thought that this is the type of interpretative question that could appear in some form on the CIPM Expert Level exam.

Basically, the so-called “in transition” assets must be part of the firm assets on the firm's performance presentations, but not part of composite assets. In particular, the points in time where you need to worry about these are at the end of the year, as GIPS provision 5.A.1.c (GIPS 2005) requires the presentation to include information on the amount of firm assets and composite assets at the end of each annual period.

Examples of “in transition” assets include:

• An account that was GIPS discretionary, but the client has indicated they are closing they are closing the account (thus discretion can be inferred to have been lost) but the account had not been fully liquidated/closed at the end of the year. For example, if a client called to say they were leaving the firm on December 17, 2009, but the account had not been liquidated until January 5^th. Assuming the period for performance calculations is monthly, the account is not part of its composite for the month of December, but is part of the firm assets.
  

• A new account to the firm, that will become GIPS discretionary, but has not met the inclusion requirements yet, based on the firm’s documented GIPS policies. For example, assume an account is opened on December 17, 2009, but the firm’s policy is to include new accounts in composites starting with the first full month under management. Thus, the account would not appear in the composite’s performance until the month of January 2010, but it would be part of the firm assets for the end of 2009.

• An account that is changing composites (either due to a change in client mandate or a composite redefinition; see GIPS provision 3.A.5), assuming the change occurs on December 17, 2009 but the firm’s or the new composite’s documented inclusion policy is to include the account in the new composite in the first full month under management (a la a new account). Such an account would not be part of composite assets for the month of December, would be reflected in the new composite’s return for January 2010, and be part of the firm assets for the end of 2009.

Similar logic should be applied to:

• Actual, discretionary, non-fee-paying accounts that the firm has elected to exclude from composites.

• Legally discretionary accounts that are GIPS non-discretionary accounts (based on the firm’s documented policy on discretion).

(The picture at the top of this post is the cover from John Coltrane's album "Transition." Seemed a fitting reference from a few respects. First, the album came between Coltrane's quartet period of somewhat traditional jazz, and the last major period of his life which featured more experimental styles. Also, the album was released after Coltrane's death, when one might imagine that Coltrane was making his transition from his earthly life to his spiritual one!)