Defining a 'Large Cash Flow'
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GIPS does not define a 'Large Cash Flow;' the % of total portfolio value:
GIPS standards define a 'Large Cash Flow' as the level at which the firm determines that an external cash flow may distort performance if the portfolio is not valued at the time of a 'Large Cash Flow.'
The % of total portfolio value is left up to the user with the instruction that the % of total portfolio value selected must be used consistently.
The starting point for defining a 'Large Cash Flow' would be to determine at what point does the dollar amount of a large cash flow, expressed as a % of total 'Market Value' of a portfolio, begin to affect performance calculations?
Our experience would indicate that a 'Large Cash Flow' begins to affect performance calculations when a 'Large Cash Flow' is =/> 5% of the 'Market Value' of a portfolio.
Raising the definition of a 'Large Cash Flow' above 5% can be determined and decided by increasing a 'test' cash flow and by comparing Modified Dietz calculations with TWRR/Geometric Linking calculation to determine @ which point % performance calculation variances are deemed to be significant.
Test PerfCalc to determine your definition of a 'Large Cash Flow.'
For example:
- Enter a dated (starting) Market Value; 12/31/2009, $100,000.00.
- Enter a dated Investor Contribution; 08/15/2010, $1,000.00.
- Enter a Market Value on the date prior to the Investor Contribution; 08/14/2010, $100,000.00.
- Enter a dated (ending Market Value; 12/31/2010, $110,000.00.
- Check Large Cash Flows @ the TWRR/Geometric Linking tab; indicating that your want to generate a Large Cash Flows Geometric Linking performance calculation.
- Toggle between the Modified Dietz tab and the TWRR/Geometric Linking tab.
- View the performance calculation differences.
- Increase the Investor Contribution, toggle again, raise the contribution, and repeat until a variance is reached where the performance calculation differences are meaningful/significant to you, and set your definition of a 'Large Cash Flow.'