A custom blended benchmark consists of underlying source entities based on weights, rates of return, and entity assignments at node levels. For example, suppose Custom Index 1 is equal to 40 percent of the S&P 500 at the equity level and 60 percent of the Lehman Aggregate Index at the fixed income level. The custom index calculator then generates the total level from the equity and fixed income levels.
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Before you create a blended benchmark, consider whether using a floating benchmark can provide more flexibility for future benchmark changes. Floating benchmarks include all functionality available with blended benchmarks and additionally offer the ability to define a reset frequency for rebalancing weights and to apply weights from another entity. |
See Create a Blended Weighted Benchmark
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An example of how PACE calculates the weights and returns for blended benchmarks is described in the following paragraphs.
The blended benchmark weights for December month-end are used to calculate the January return for the custom benchmark. See the following figure.
The returns that are below the total level of the source index are copied to the target blended index for the period. For example, if you drilled into the blended benchmark down to the security level, the returns for each stock in the blended benchmark are the same as those from the source indexes.
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Given the following dictionary assignment example:
Total:
Equity S&P 500 50 percent
Fixed Income:
Short Term LIBOR 25 percent
Long Term LEHMAN 25 percent
Assume the rates of return defined in the following table for the sample blended benchmark.
Benchmark | Return |
|---|---|
S&P 500 | 0.50 |
LIBOR | 0.10 |
LEHMAN | 0.30 |
The custom blended benchmark builder writes to the Commit Journal for each entity that is processed. Using the Commit Journal, benchmark returns can be finalized or disapproved like other entities processed by the performance return or composite weighted return report.
Returns are assigned and copied at the Equity, Short Term, and Long Term nodes. Returns are calculated at the Fixed Income and Total nodes. The following table shows data calculated by the Entity Builder.
Node | Return | Formula | ABAL | ||
|---|---|---|---|---|---|
Total | 0.35 | (50% * 0.50) + (50% * 0.20) | 100 | ||
Equity | 0.50 | copy (from S&P 500) | 50 | ||
Fixed Income | 0.20 | (25%/50% * 0.10) + (25%/50% * 0.30) | 50 | ||
Short Term | 0.10 | copy (from LIBOR) | 25 | ||
Long Term | 0.30 | copy (from LEHMAN) | 25 |
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