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For example, 50 percent LEHMAN + 50 percent S&P500, where the weights are reset to 50 percent quarterly and allowed to float with the market in between quarters. Reset dates are configured and set using a date rule and a business calendar.
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| Floating type custom benchmarks include all functionality available with Blended type benchmarks. Float type custom benchmarks additionally offer you the option to define a reset frequency for rebalancing weights and to apply weights from another entity. If you are creating a custom benchmark that requires current blended benchmark functionality, you can set up the custom benchmark as a Floating type benchmark to provide greater flexibility for the benchmark in the future. |
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You can configure a blended benchmark so that PACE determines the weights to use, where the weights are calculated based on the component index returns between reset dates. This type of benchmark is called floating weight blended benchmark. An example of how PACE calculates the weights and returns for these types of benchmarks follows.
Suppose blended benchmark weights for December month end are used to calculate the January return for the custom blended benchmark. See the following figure.
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Assume that the weights for February month end are to float based on the market changes.
First, calculate the February month-end returns using the January month-end weights. The January month-end weights are calculated by referencing the December month-end weights and the January returns. See the following figure.
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January Month-End Weights Used to Calculate February Return
The January month-end weights are calculated by growing the December weight by the January return, and then re ratioing the resulting weights to 100 percent.
The weights used in the calculation are those that are stored in the ABAL column on the PERF_SEC_RETURNS table. The returns used are those that are stored in the PSR_USER_FLOAT8 column (or the TOT_RETURN column, for clients who installed Eagle Performance prior to V11.0).
Each time the system builds the floating weight custom benchmark, it inserts a new custom index attributes definition record in the Custom Index Attributes table for that effective date.
The PACE Floating Weight Calculator uses the following methodology to populate the RULES…CUSTOM_INDEX_ATTRIBUTES table:
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The return is the PERFORM..PERF_SEC_RETURNS.PSR_USER_FLOAT8.
(This field is a default but you can alter it. It is set up using an internal field attribute 325 called i Blended BNCH Wght Col. This is created using the scripts — you do not need to create this field attribute. The floating return can be changed from the default of PSR_USER_FLOAT8 to another return field by running the following script:
Update rules..field_attributes set field_name = mod_dietz_return* where field_attribute_id = 325.
In this example, mod_dietz_return is the new return field to be used.)
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Next, Eagle populates the Custom Index Attributes table for this effective date with the new weights that it calculated according to the math described below. When it creates a new record in the Custom Index Attributes table for the custom index attributes definition, it copies the previous record's data, and applies the newly calculated weights. It populates other fields in the record just as they appeared in the previous custom index attributes definition from the Custom Index Attributes table, with the exception of the update user, update time, and instance fields.
Finally, after the system populates the Custom Index Attributes table, the entity build procedure begins. These two steps cannot be separated.
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On user-designated reset dates (which you must identify using a Business Calendar) the system resets weights that are floating. On each reset date, the Eagle system looks for the most recently dated custom index attributes definition with a RESET_FLAG that is set to Y and takes the weights from this definition without floating them. A custom index attributes definition with a reset flag of Y indicates it is a reset value, and the system can apply its weights for reset purposes on the next reset date.
When does a custom index attributes definition have a RESET_FLAG set to Y? The system sets the custom index attributes definition's RESET_FLAG to Y when:
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- Calculate the drift numbers.
Index 1 (index rtn/100) * current weight = drift #1
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- (15/100) * 50 = 7.5
Index 2 (index 2 rtn/100) * current weight = drift #2
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- (-10/100) * 50 = -5
- Calculate the new weights.
Previous weight (current weight from previous step) + Drift #1 = New weight Index 1
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- 50 + 7.5 = 57.5
Previous weight (current weight from previous step) + Drift #2 = New weight Index 2
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- 50 + (-5) = 45
New weight Index 1 + New weight Index 2 = Total new weight
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- 57.5 + 45 = 102.5
- Return the numbers back to a 100 percent ratio.
Weights must equal 100 for the custom index builder process.
New weight Index 1/Total New weight * 100
57.5/102.5 = x/100 x = 56.1
New weight Index 2/Total New weight * 100
45/102.5 = x/100 x= 43.9
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Weights float until you specify a reset date. A reset date is a date on which the system no longer floats from previous values but resets to the original or last updated weights for the benchmark in the Custom Index Attributes dialog box. That is, on the reset day, the weights reset to those weights associated with the most recent date for the custom benchmark definition where the RESET_FLAG = Y in the CUSTOM_INDEX_ATTRIBUTES table for that specific entity. For more information about the RESET_FLAG, see Rebalance Floating Weights Using Reset Dates.
To specify a reset date, you use the business calendar. Eagle recommends that you keep the source and business calendar used for resets separate from other business calendars so that the reset functionality is not dependent on another calendar's dates.
To set up reset dates for a floating weight blended benchmark:
- From any Eagle window, click the Eagle Navigator button to access the Eagle Navigator.
- Enter Sources in the Start Search text box.
- Click the Sources (Reporting Center) link to access the Sources workspace.
You see the Sources window. - Click Add.
The Add Source Details dialog box appears. - Add a new interface (source) with a meaningful name such as Source for Floating Weight Reset Dates. Under Available Feed Types, select Performance. See the following figure.
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- Update the Business Calendar for the source as follows:
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- from any Eagle window, click the Eagle Navigator button to access the Eagle Navigator. Enter Business Calendar in the Start Search text box.
- Click the Business Calendar (System Management Center) link to access the Business Calendar workspace.
- Choose the source created for the floating weight blended benchmarks and select the check boxes, under the Daily column, for the reset dates. Make sure to use the Daily column — the program only uses this column. For example, if you reset on a quarterly basis, then only select four dates with a check mark.
- Click Save before exiting.
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The custom benchmarks from the previous example only use the weights and nodes from the reference entity:
- Total --> > Common S&P 500 – 40%
- Total --> 144A --> Health Care ML Health Care Index – 10%
- Total Total --> Corp L AGG L AGG – 12%
- Total --> Gov L AGG – 8%
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