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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The Blended Benchmark calculator multiplies the beginning-of-period weights and the returns over the period for the source indexes to determine the contributions towards the blended benchmark return for the period. Then, the Blended Benchmark return equals the sum of these contributions.
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.
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Blended Benchmark Weights in Return Calculations
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.
The weights below the total level, however, are different. PACE weights the weights to determine the weight of the security or segment in the new index. For example, if a stock is made up of 5 percent of the source index and the source index is 50 percent of the blended index, the stock is 2.5 percent of the blended index.
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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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In this example, you set up a 10/60/30 asset class blend of cash/equity/fixed income from three different underlying indexes.
For an example of a blended benchmark that uses a single source entity, see Choose Same Source Entities within Multiple Target Nodes. For an example of a blended benchmark used as a carve out, see Create a Carve Out.
To create a blended custom benchmark:
- From any Eagle window, click the Eagle Navigator button to access the Eagle Navigator.
- Enter Entities in the Start Search text box.
- Click the Entities (Performance Center) link to access Entities.
The Entities page appears.
- Click Create.
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- In the Entity Info tab, in the:
- Type list box, select Custom Benchmark.
- ID and Name fields, enter the entity ID and name for the custom benchmark.
- In the Entity Details tab, enter the Inception Date for the custom benchmark.
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- In the Custom Index Attributes tab, define the blended custom benchmark. Refer to Editing Entity Dialog Box Options.
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- Cash component of the blended benchmark, you assign the 3-Month Treasury Bills index as your source entity.
- Equity component of the blended benchmark, you assign the Domestic Equity index as your source entity.
- Fixed Income component of the blended benchmark, you assign the Domestic Fixed Income IG index as your source entity.
In this example, you assign each source entity at the Total level and assign weights that total to 100%. However, you can assign a source entity below the Total level or can assign weights that do not total to 100%.
- In the target dictionary grid area, select each node of the target dictionary that you want to assign, and double-click the corresponding button for that row.
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- In the Custom Index Attributes Dialog box, assign the source entity, source, source dictionary, source dictionary node, and weight data. For details, see Custom Index Attributes Dialog box Options.
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- Click the Selection check box that corresponds to the source dictionary node you want to assign.
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- Continue assigning target dictionary nodes, as needed.
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- After you assign values for each node, those values appear in the target dictionary grid. See the following figure for the values used in this example.
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- Click the Finish button.
Additional tabs are available in the entity setup, but those tabs are not required for the custom benchmark setup.
The custom index attribute information is saved in the database in the RULESDBO.CUSTOM_INDEX_ATTRIBUTES table.