Composite
Under the performance standards, all of a firm's fee-paying discretionary portfolios run to one strategy, grouped together so a record cannot be assembled from the successes.
Where you will meet it
Composite appears in 11 learning outcomes on the CFA syllabus. A few of them:
- Put the Performance Presentation standard, III(D), into practice
“That prohibits presenting a composite as though it were a single account, omitting terminated accounts, showing a simulated or back-tested record without labelling it as such, or presenting gross-of-fee figures without saying so.”
- Propose practices and procedures that stop breaches of the ethics Code and the Standards of Professional Conduct before they occur
“For performance, composites that include terminated accounts, clear labels on simulated or prior-firm results and a statement of whether returns are gross or net of fees, with GIPS compliance as best practice.”
- Explain unsupervised machine learning algorithms (k-means clustering, principal components analysis and hierarchical clustering) and decide which kinds of problem each handles best
“Principal components analysis replaces many correlated features with a smaller set of uncorrelated composites.”
- Give the reasons a practice, policy or action complies with, or breaches, CFA Institute's Code and Standards
“The manager traded before filling client orders, so VI(B) is breached; the composite quietly dropped terminated accounts with poor returns, so III(D) is breached; the referral fee was disclosed only after the mandate was signed, so VI(C) fails.”
Practise it
Practise composite until it is automatic: questions that explain every wrong option.
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