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.

Calculate Weights and Returns

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.

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.

Calculate Weights and Returns Example

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.

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.

Configure Custom Blended Benchmarks

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:

1. From any Eagle window, click the Eagle Navigator button to access the Eagle Navigator.
2. Enter Entities in the Start Search text box.
3. Click the Entities (Performance Center) link to access Entities.

The Entities page appears.

1. Click Create.

The Creating a new entity dialog box appears. See the following figure.

Creating a New Entity Dialog Box – Entity Info Tab

1. 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.

1. In the Entity Details tab, enter the Inception Date for the custom benchmark.

This field is not required, but as a best practice, Eagle recommends entering an inception date that matches the effective date of the earliest definition (that is, the earliest date associated with data entered in the Custom Index Attribute tab) for the custom benchmark.
You must specify a base currency value in order to perform currency conversion. If you are performing multicurrency conversion for the benchmark, Eagle's best practice is to specify a base currency value in the Base Currency field.
Also, be sure you defined the Base Currency for any underlying indexes associated with this Custom Benchmark.

Editing Entity Dialog Box – Custom Index Attributes Tab

1. In the Custom Index Attributes tab, define the blended custom benchmark. Refer to Editing Entity Dialog Box Options.

The previous figure shows how this tab appears after you set the Type to Blended and select a target dictionary. The grid at the bottom of the tab shows the structure of the target dictionary selected.
For more information about the currency conversion process, see Calculate Returns Using Currency Conversion.
The following figure shows the Target Dictionary Grid that appears when you click Maximize. Initially the source data in the white area is blank. The following figure shows how the grid looks after configuration is complete.

Target Dictionary Grid
Review the previous figure to see how it looks after you set up a 10/60/30 asset class blend of cash/equity/fixed income from three different underlying indexes. For the:

• 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%.

1. 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.

You can select the node directly from the grid in the Custom Index Attributes tab or can select the node from the maximized grid window.
The Custom Index Attributes dialog box for the selected node appears. See the following figure.

Custom Index Attributes Dialog box

1. 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.

In this example, the previous figure shows the source information entered for the target dictionary's Cash component. You assign the 3-Month Treasury Bills index, which uses the Asset Class Model, at the Total level and assign it a weight of 10%. The following table describes the fields in this dialog box.
If you are assigning nodes below the Total level of the source dictionary and click the Select Level link, the Dictionary Node Selection Dialog box appears. See the following figure.

Dictionary Node Selection Dialog Box

1. Click the Selection check box that corresponds to the source dictionary node you want to assign.

In this example, you are assigning the Total level of the 3-Month Treasury Bills index as the source of the Cash component of the blended benchmark, so you do not need to select a lower level.
The target dictionary grid displays the information you entered in the Custom Index Attributes Dialog box for the selected node.
The entity build process creates target dictionary nodes below the assigned level only if you clear the Do not build Target Dictionary below assigned level check box. For more information, see Build the Target Dictionary at Assigned Level and Above.
If you clear the Do not build Target Dictionary below assigned level check box, each time you assign nodes to the target model or save the custom benchmark, the system validates that the source performance model(s) and target performance model have compatible structures. It counts the levels below the assigned source node and ensures that there are at least that many levels below the assigned target node. If the target has fewer nodes, the following warning message appears:
There is a problem with the definition of the target node [NAME] on the effective date [DATE}. A node within the source dictionary is not compatible with its assignment within the target dictionary. There are: (#) levels below the assigned source node and there are (#) levels below the assigned target node. To correct this problem make a different assignment or choose the option "Do not build the Target Dictionary below assigned level".

1. Continue assigning target dictionary nodes, as needed.

In this example, you enter the information shown in the following figure for the Equity component of the target dictionary.

Custom Index Attributes Dialog box
And you enter the information shown in the following figure for the Fixed Income component of the target dictionary.

Custom Index Attributes Dialog box

1. 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.

Custom Index Attributes Dialog box

1. 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.