GIPS Composite Construction

Without rules, an asset manager could hand-pick their five best-performing client accounts and present that average return as "the strategy's performance," quietly excluding the accounts that lagged. GIPS composite construction closes this loophole by requiring that every fee-paying, discretionary portfolio managed to a given strategy be included in that strategy's composite, no cherry-picking allowed.

The core rules

A composite must include all actual, fee-paying, discretionary portfolios that follow the same investment mandate, objective, or strategy, added within a defined time period after the portfolio starts trading that strategy (typically within the first full month or quarter). Portfolios can't be excluded just because they underperformed, and once terminated a portfolio's historical returns must stay in the composite through its last full period, not be dropped retroactively. The composite return itself is an asset-weighted average of the individual portfolio returns, so a single very large account doesn't get the same voice as a tiny one unless weighted by assets.

Worked example

A manager runs a small-cap growth strategy across 40 client accounts. Three new accounts funded mid-quarter, two accounts terminated last quarter, and one account underperformed sharply due to a client-imposed restriction. Under GIPS, all 40 accounts (including the underperformer and the two terminated ones through their last period) must be asset-weighted into the small-cap composite, the manager cannot present only the 37 accounts that look best.