AA1.03 gave you the load-bearing rules: every actual, fee-paying, discretionary portfolio must sit in at least one composite (the anti-cherry-picking provision); composite returns are asset-weighted; terminated portfolios stay in through their last full measurement period; composites are defined in advance. Three things sit one level deeper, and belong here:
- New-portfolio timing. A firm must have a documented, objective policy for exactly when a new account enters its composite (for example, from the start of the first full month under management) and must apply it consistently to every account. A firm may not decide, account by account, after watching the first quarter's numbers, whether a new portfolio's inclusion should be backdated or delayed.
- Non-fee-paying portfolios. Only fee-paying discretionary portfolios are mandatory composite members. A firm may voluntarily include non-fee-paying discretionary portfolios (commonly the firm's own seed capital or employee accounts), but if it does, it must disclose what percentage of composite assets they represent, precisely because such accounts carry no fee drag and may run under a subtly different risk tolerance than a real client would tolerate, and a composite quietly padded with them can look better than what a paying client actually receives.
- The carve-out rule (since 1 January 2010). A carve-out presents one segment of a multi-asset-class portfolio (say, "just the equity sleeve of a balanced mandate") as if it were a stand-alone track record. Before 2010, firms could attach a notional cash balance to a carve-out after the fact, flattering its risk-adjusted profile with cash it never actually held moment-to-moment. Since 2010, a carve-out may be included in a composite only if it has actually been managed with its own, separately maintained cash balance for the period shown, a real stand-alone portfolio in practice, not a slice computed retroactively on paper.
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How are pooled funds reported under GIPS?
The 2020 edition also split reporting for pooled vehicles by audience: a Broad Distribution Pooled Fund (offered to the general public, a retail-style scheme) requires a GIPS Pooled Fund Report made available to any prospective investor on request; a Limited Distribution Pooled Fund (offered only to specific investors, typically institutional) is reported more like a composite, to prospective investors in that fund specifically.