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Data Sets, Benchmarking and Indices

Is Your Benchmark the Right One?

Good quality data sets, especially return data, are essential to many aspects of asset management, including quant strategies, portfolio optimisation models and asset allocation, to mention just a few. Decades of data lie behind many indices, from which a host of benchmarks are derived. Regulatory bodies are forcing retail asset managers to adopt benchmarks for clients, while the comparison of asset manager performance, 'relative to benchmark' is a standard offering of many investment consultants.

This selection of papers includes CFA Institute Research Foundation’s treasure trove of data for US major markets dating back to 1926, while Intech debates the best benchmark or index for defensive equity strategies. Among the other papers, a lively discussion touches upon which benchmark is the right one, whether multiple benchmarks are required for single portfolios, or if benchmarks are required at all.

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Stocks, Bonds, Bills, & Inflation: 2020 edition (CFA Institute Research Foundation)

For compliance reasons, this paper is only accessible in certain geographies

CFA Institute Research Foundation's 2020 Summary Edition of Stocks, Bonds, Bills, and Inflation®️ is an absolute treasure trove of data for investors to mine. With information dating back to 1926, this is an excellent resource from which to glean asset class characteristics over the long term, as well as insights into return calculations.

Model Portfolio Management: Consistency or customization? (Jacobi, 2020)

For compliance reasons, this paper is only accessible in certain geographies

Jacobi highlights the widespread use of model portfolios across the US financial services industry using Capital Market Assumptions and portfolio or asset allocation optimization techniques derived from long-run data sets. Having access to reliable datasets allows rapid customization of portfolios to meet the specific needs of a client or in the setting of appropriate benchmarks.

Improving Diversification with Uncorrelated Market Exposure (Nuveen, Sep 2020)

For compliance reasons, this paper is only accessible in certain geographies

Nuveen suggests that having 28 years of private real assets return data is invaluable in aiding portfolio optimization. Their information has demonstrated an allocation to the asset class may improve the returns of more conventional stock-bond portfolios, whilst diversifying away some of the risk found in REIT and commodity allocations.

How a New Benchmark Adds to Defensive Equity Strategy Evaluation (Intech, 2020)

For compliance reasons, this paper is only accessible in certain geographies

Intech suggests that switching from a typical cap-weighted benchmark used in an active defensive equity strategy to a minimum volatility index may enable more straightforward evaluation of managers. One retains the benefits of defensive equity exposure with its lower volatility and downside protection, but adds a more easily measurable alpha component. However, the design constraints of the index or benchmark selected need to be fully understood.

Why benchmarks matter (Verus Investments, 2019)

Verus Investments highlights how choosing the correct benchmark is an integral part of the investment process. One needs to be aware of the limitations of any particular benchmark and allow for such factors when selecting it. Tracking error also arises in instance where chosen benchmarks differ from indices specified within investment policy statements. Fortunately, there are tools to help manage these issues and other index-related concerns.

Is There Too Much Benchmarking in Asset Management? (2020)

This academic paper questions the value of benchmarking, particularly with indices, as it may lead to inflated asset prices and crowded trades. The authors argue that benchmarking managers incentivises them to generate higher abnormal returns while also protecting them from risk, as very few have compensation entirely determined by excess performance over a benchmark.

Policy Benchmarking: A guide to best practices (Cambridge Associates, 2017)

In this report, Cambridge Associates argues that even in a world of rapidly changing portfolio metrics, assets, and profiles, policy benchmarking is still an essential tool. They provide illustrations of a total portfolio policy benchmark framework and outline benchmarking best practices.

Total Portfolio Benchmarking (Meketa, 2019)

Meketa offers its take on total portfolio level benchmarking, suggesting that several approaches may be taken. They also look at how benchmarks can be used to achieve different goals and argue that at least two or more total portfolio benchmarks should be considered by institutional investors.

Addressing the Benchmarking Challenge in Private Equity (JP Morgan AM, 2018)

Private Equity is notoriously difficult to benchmark, argues JP Morgan Asset Management. PE investments do not have a readily identifiable reference index of liquid, tradeable assets, cash flows vary over time, and the assets themselves usually lack liquidity. They offer some suggestions for potential benchmarks, but caveat that each has its own limitations.

Performance Attribution: History and Progress (CFA Institute Research Foundation, 2019)

This CFA Institute Research Foundation review looks at the history of performance attribution since its inception in the 1970's through to its most recent incarnations in the more detailed models now used in fixed income and risk-adjusted markets. A range of attribution types are discussed, from the plain vanilla returns or holdings based, through to the more nuanced. sometimes used with notional funds.

Model Portfolio Frameworks for U.S. DB Schemes (Russell Investments, 2020)

For compliance reasons, this paper is only accessible in the United States

In this paper from Russell Investments, they look at the growth in model portfolios and benchmarking, which aid asset allocation decisions. However, they find that such a structured approach is difficult for corporate defined benefit (DB) schemes as each has its own little quirks and foibles.

Making Sense of Defensive Equity Indexes (Intech, 2019)

For compliance reasons, this paper is only accessible in certain geographies

Intech reviews the major defensive equity indices, investigates the differences between them and makes suggestions as to how they might be improved. They provide ideas as to how active defensive equity strategies should best be measured.

ESG Disclosures: The bedrock of the sustainable finance agenda (Invesco, 2020)

For compliance reasons, this paper is only accessible in certain geographies

Invesco’s paper highlights one of the major problems of ESG investing, namely the lack of consistent, easily applicable, and standardised data. They argue that a future framework should take a four pillars approach, with reporting standards that are internationally consistent.

ESG investing - getting under the hood (DWS AM, 2020)

For compliance reasons, this paper is only accessible in the United Kingdom

DWS looks at how ESG metrics are quantified and defined, compares the results from leading index providers for different geographies and draws some interesting conclusions, particularly with regards to ESG in Emerging Markets.