Investment philosophy of the manager
This discrepancy is termed "dispersion" and represents the standard deviation of the difference between the individual portfolios' returns. The composite performance, as reported by the manager, represents the average performance of all the individual accounts. This is important for you to know, as the question may arise with clients from time to time and your ability to articulate this is critical.
What Are The Rules?
The Association for Investment Management and Research (AIMR) determines the rules for calculating performance. AIMR, the professional organization of money-management organizations and retirement plan administrators, has developed globally accepted standards for reporting investment performance. While AIMR has extensive performance-reporting requirements, the three most important rules in calculating performance under AIMR standards are:
Each of the firm's discretionary fee-paying portfolios is in at least one performance composite.
The composite performance for a group of portfolios of similar styles represents the manager's reported performance for that style of investing.
Performance for each composite must be asset-weighted.
AIMR exists to ensure that firms record an accurate picture of the product's complete performance record. Without this requirement, there is a potential for firms to exclude poor-performing portfolios from the appropriate composites. This could give you an incomplete picture and cause you to inaccurately evaluate a manager.
Caveat Advisor
However, there are shortfalls to the AIMR requirements. You need to do additional analysis of the composite in order to assess whether historical returns are a reasonable depiction of the performance your client should expect. While firms must disclose all performance composites to a potential client if asked, they are not required to do so until that time.