How’s constructing custom security-based benchmark different from constructing the actual portfolio? It is based on manager’s investment process, uses the same securities and weighting methodology and is rebalanced regularly. Would not it just replicate the portfolio then?
The custom security benchmark replicates the pm’s standard portfolio based on process, style and weighting. This becomes the benchmark, to which the manager then makes active decisions against. It seems a bit screwy. The only custom benchmarks I’ve seen are index combos such as 50% R1000, 30% R mid cap, 15% R2000, 5% cash.
Hmm, isn’t “50% R1000, 30% R mid cap, 15% R2000, 5% cash” similar to return-based benchmark? It is a combination of investment style indices…
Yeah, you’re right, didn’t think of that. I guess my point is I’ve never seen a custom structured bench where a fund committee picks individual securities weighted to a managers style.
Anyone else have thoughts on this?
The idea behind custom security benchmark is that it mirrors managers style for strategic purposes. The benchmark is initially created in consultation with the manager as to components and their weightings. Manager can still generate alpha with tactical asset allocation by over weighting or under weighting the components of the custom bench mark he helped create. So the mmanager will be measured for his active performance with respect to the benchmark / style he chose. Hope it makes sense.