A composite is defined as a group of portfolios that are managed with the same strategy or objective. Rather than presenting the performance of each individual portfolio, the firm can simply disclose the composite return of the portfolios as a group.

The determination of which portfolios to include in the composite should be done according to pre-established criteria (i.e., on an ex-ante basis), not after the fact. This prevents a firm from including only their best-performing portfolios in the composite.

The composite return is the asset-weighted average of the performance results of all the portfolios in the composite.

The following is not required for the Level I candidate but is provided as a reference only.

Composite construction

• All actual, fee-paying, discretionary portfolios must be included in at least one composite.
• Firm composites must be defined according to similar investment objectives and strategies.
• Composites must include new portfolios on a timely and consistent basis soon after the portfolio is being managed.
• Terminated portfolios must be included in the historical record up to the last full measurement period that the portfolio was under management.
• Portfolios must not be switched from one composite to another unless this change is documented in the client guidelines or if there is a redefinition of the composite. The historical results must remain with the old composite.
• Convertible and other hybrid securities must be treated consistently across time and within composites.
• Before January 1, 2010, if a single asset class was carved out of a multiple-asset portfolio and the returns presented as part of a single-asset composite, cash must be allocated to single-asset returns and the allocation method must be disclosed.
• From January 1, 2010 on, carved-out returns must not be included in single-asset-class-composite returns unless the assets are actually managed separately and have their own cash allocations.
• No model or simulated performance may be linked to actual performance. Composites must include only assets under management.