How is composite different from a regular index?

A composite is a group of similarly managed portfolios. Think of it from the perspective of an investment management firm with individual clients. If you have 3 clients with 100% US large cap stock portfolios then those 3 portfolios could go in the firm’s US Large Cap Stock Composite. The benchmark of this composite would likely be the S&P 500, which is obviously a “regular index”.
 
That’s not correct, at least in the way OP framed the question. Every mutual fund has a composite portfolio it’s based off of. The composite performance is used to sell to those that want a separate account. Also, you can run a composite portfolio to get GIPS compliant without a 40-Act fund structure.
You (being a PM) run your composite against an index or benchmark.
Tl;dr - Third parties build indexes. You build a composite portfolio.
Edit: I’m speaking from an American perspective only. Could be different elsewhere.
 
I might be showing my ignorance here… but I believe smores is correct. Institutional separate accounts are managed to their specific mandates. Similar accounts are grouped into a composite for performance reporting / marketing purposes, but my understanding is that a composite isn’t managed as an entity in and of itself like a fund.
What STL is describing sounds more like a retail SMA (wrap account) model portfolio.
That said, to answer the original question both above responses are correct. Indexes are calculated by index vendors, composites are based off of actual portfolios managed by investment managers.
 
I think both views are correct. The main difference is that index data will be sourced from a 3rd party. Composite data must be calculated in house.
The long answer is very long. Do the CIPM and find out just how both are constructed.
 
You must log in or register to reply here.
Back
Top