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  • Current

    Effective: 20 June, 2024
    Categories: Benchmarks
    Source:

    Our firm has a balanced composite that has a portfolio-weighted custom benchmark. This composite includes a large number of portfolios with customized blended benchmarks. Each portfolio in the composite has a strategy that is consistent with the composite definition, but portfolios have slightly different asset allocations and different underlying benchmarks. Provision 4.C.34 states that when a portfolio-weighted custom benchmark is used, a firm must disclose the components that constitute the portfolio-weighted custom benchmark, including the weights that each component represents, as of the most recent annual period end. A firm must also disclose that the components that constitute the portfolio-weighted custom benchmark, including the weights that each component represents, are available for prior periods upon request.

    Because there are so many different underlying benchmarks in our composite’s portfolio-weighted custom benchmark, if each underlying benchmark and its respective weight were presented as of the most recent annual period end, the disclosure in our GIPS Composite Report would be two pages long. May we instead disclose the weights of the asset classes that comprise the portfolio-weighted custom benchmark?

    The firm must include each portfolio’s actual benchmark as the components in the benchmark return calculations. However, the disclosure about these components can be aggregated into larger groupings. A firm has options for making this required disclosure. When a portfolio-weighted custom benchmark is used, for purposes of meeting the requirement to disclose the components that constitute the portfolio-weighted custom benchmark, the firm may determine how best to disclose the benchmark components given the respective composite strategy. The definition of component can be determined on a composite-specific basis. Components could be defined as

    • the individual benchmarks within the portfolio-weighted custom benchmark,
    • the regions or asset classes of the individual benchmarks within the portfolio-weighted custom benchmark, or
    • criteria important to the management of portfolios in the composite, such as duration groupings for LDI composites, within the portfolio-weighted custom benchmark.

     

    The firm must disclose the components and related weightings of those components as of the most recent annual period end. If the firm discloses aggregated benchmark component information, it must offer to provide information about the benchmarks within each component upon request. The firm must also disclose that the individual benchmarks that constitute the portfolio-weighted custom benchmark, including the weights that each individual benchmark represents, are available for prior periods upon request.

    Sample Disclosures:

    LDI Composite
    The LDI Composite Custom Blended Benchmark is calculated monthly by asset-weighting the individual account benchmark returns using the same weights as the account weights in the composite. Each portfolio in the composite uses as the benchmark its projected liability cash flows. As of 31 December 20XX, the duration of the portfolio-weighted custom benchmark is approximately 15 years and consists of 5% in AA Credit 3–5 years, 7% in AA Credit 5–7 years, 22% in AA Credit 7–15 years, 43% in AA Credit 15–25 years, and 23% in Treasury STRIPS 20+ years.

    Information about the individual benchmarks within each duration range is available upon request. Information about benchmark components for prior periods is also available upon request.

    Balanced Composite
    The Total Return Objective Moderate Custom Benchmark is calculated using the benchmarks of the portfolios in the composite. The benchmark is rebalanced monthly based on the beginning values of portfolios included in the composite. Portfolio benchmarks are unique to each portfolio but generally consist of multiple benchmarks using public market indexes. As of 31 December 20XX, the custom benchmark includes

    • Domestic public equity (32.5%)
    • Nondomestic public equity (19.2%)
    • Real estate (5.8%)
    • Bank loans (4.9%)
    • High yield (9.5%)
    • Core fixed income (19.1%)
    • Treasuries (9.0%)

    Information about the individual benchmarks within each asset class is available upon request. Information about benchmark components for prior periods is also available upon request.

    Fixed-Income Composite
    Fixed-Income Benchmark Composition Weighting

    Asset Class                                                   12/31/20XX
    Swiss Bonds                                                          35%
    European Government Bonds                    14%
    European Corporate Bonds                         18%
    Global Corporate Bonds                                22%
    High-Yield Bonds                                                6%
    Global Convertible Bonds                              5%

    The benchmark is composed of the benchmarks of all individual portfolios included in the composite. Due to a large number of underlying indexes, the components of the portfolio-weighted custom benchmark are presented at the aggregated asset class level. The components that constitute this portfolio-weighted custom benchmark and their weights, as well as the individual indexes, are available for all periods upon request. This custom benchmark is rebalanced on a monthly basis in order to reflect any changes of benchmark indexes of the portfolios in the composite.