The constrained benchmark allows you to constrain, or limit, the weight of a security or segment level of a vendor-supplied index and:

• Proportionately reweight the remaining securities and segments.
• Recalculate the returns above the constrained level using the new constraint-weighted returns.
• Reweight the securities and segments below the constrained level using the new constrained weights.

Two types of constraints are supported:

• Cap constraint. Sets the upper limit that the weight of a segment or security can take in the target custom benchmark. If the CAP is not reached, the vendor-supplied benchmark weight for the segment is used for the period.
• Fixed constraint. Sets the exact weight that a segment or security takes in the target custom benchmark.

You can set constraints at more than one level of the structure. For example, you can constrain a segment to a particular weight and a security within a different segment to a particular weight. The software does not support constraining a segment and a security within that segment.

Calculate Weights and Returns

The methodology for calculating constrained benchmarks follows:

1. Calculate the Total Constrained Weight = (Sum of all the constrained weights).

• Constrained weights = (the newly assigned weight for the segment or security – the vendor-supplied weight for the segment or security).
• Sum the constrained weights from Step 1.

1. Calculate the Sum of the Total Original Source Weight at all constrained levels.

Sum the original source weight before the constraints.

1. Calculate the New Weights for the constrained securities and segments and the securities and segments below the constrained level using:

• Weight Change = (Source weight for segment or security * That Segment or Security's Constrained Weight) / (That Segment or Security's Total Original Source Weight)
• New Weight = Weight Change + Original Source Weight

1. Calculate the New Weights for all remaining (nonconstrained) levels.

• Weight Change = –1*((Source weight for segment or security * Total Constrained Weight (Step  1b)) / (1 – (Sum of the Total Original Source Weight at all Constrained Levels (Step 2))
• New Weight = Weight Change + Original Source Weight

1. Copy all the security and segment returns, except those for the constrained level and above, from the source to the target (custom benchmark).
2. Calculate the New Returns for the segments above the constrained segment.

• Reproportion the New Weights (calculated in Steps 3 and 4) to 100 percent for the target benchmark.
• Calculate the New Returns: Sum (Return * New Weight) of all the underlying segments or securities.

Constrained Benchmark Example

For the purposes of example, assume the source index (vendor-supplied index) and constraints listed in the following table.

The following table lists the data for the source index for this example constrained benchmark.

In the following table, the resulting target data for the constrained benchmark is listed.

Complete the following:

1. Calculate Total Constrained Weight = 10% - 17.97% = -7.97%.
2. Calculate the Sum of the Total Source Weight at all Constrained Levels = 17.97%.
3. Calculate the New Weights for the constrained segments/securities and those below the constraints. For example:

• Total Australia Weight Change = (17.97% * -7.97%) / (17.97%)
• Total Australia New Weight = -7.97 + 17.97% = 10%

1. Calculate the New Weights for the remaining (nonconstrained) levels. For example:

• Total UK Weight Change = 1*((21.65% * -7.97%)/(1 17.97%)) = 2.10%
• Total UK New Weight = 2.10% + 21.65% = 23.75%

1. Copy all security and segment returns, except those for the constrained level and above.

For example: Total UK Return = 3.475919
Returns above the constrained node are recalculated — in the example in the following table, only the Total return is recalculated.

Configure a Constrained Benchmark

You can create a custom benchmark with a type of Constrained. In this example, the custom benchmark constrains the Domestic Equity Index weights, setting the Oil & Gas sector to 10% and capping the Mining sector to <= 5%.
To configure a constrained 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. You see a list of entities.
4. Click the Create link.

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

Creating a New Entity – Entity Info Tab

1. In the Entity Info tab:

• Set the entity Type to Custom Benchmark.
• Enter the entity ID and name information 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.

Editing Entity – Custom Index Attributes Tab

1. Select the Custom Index Attributes tab, shown in the previous figure, and define the critical data for the definition of the custom benchmark:

• Effective Date. The effective date of the custom index attributes definition when you save it in the database. In the Select Historical Date section, select one of the following options to identify the date for the attributes you are defining:
• AsOf today
• Use earliest holding date
• Use this value <DATE>

For additional information about the historical date options, see Set Up the Custom Index Attribute for Historical Date.When you edit the entity, additional options become available. For details, see Delete Custom Index Attributes.

• Save History. This button allows you to save an "as of" definition to the database. The Finish button serves the same purpose.
• Type. The type of custom benchmark you are creating. Use a value of Constrained.
• Source. The source under which the source entity data is stored in the PERFORM database.
• Source Dictionary. The source dictionary under which the entity data is stored in the PERFORM database. When you select the source dictionary, the system displays the levels and sub levels associated with that dictionary in a grid at the bottom of the tab.
• Entity. The source entity from the PERFORM database.
• Date Rule. This option does not apply for this type of benchmark.

1. In the grid area at the bottom of the tab, enter any constraints that apply to an entire segment level by entering the constrain flag and weight percentage at the desired level:

• Constrain Flag. Used to indicate Fixed or Cap constraint, as follows:
• Cap. A cap constraint sets the upper limit that the weight of a segment or security can take in the target custom benchmark. If the cap is not reached, the vendor-supplied benchmark weight for the segment is used for the period.
• Fixed. A fixed constraint sets the exact weight that a segment or security takes in the target custom benchmark.
• Weight (%). The weight to set for the Fixed or Cap constraint.

In this example, a cap of 5% applies to the Mining sector, and the Oil & Gas sector have a fixed constraint of 10%.
If you constrain a dictionary level that includes sub levels, the Weight (%) cell for each related sub level displays a solid gray color, indicating that a "parent level" constraint applies to the sub level.

1. You can constrain individual securities for a level displayed in the grid by clicking the ellipsis button located next to a level.

The Securities Selector dialog box shown in the following figure appears, displaying securities that belong to that specific level.

Dictionary Level Securities – Security Selector with Constrain Flag

1. If you are constraining securities within a level, select the securities to constrain, enter the constrain flag and weight information, and click OK.

You can use the arrows to move securities from the Available Securities area to the Selected Securities area. In this case, the selected securities are selected for constraint.
When the Custom Index Attributes tab reappears, the Weight (%) cell for the level with constrained securities displays a solid gray color, indicating that you applied a constraint to part, but not all, of the specified level.

1. Click the Finish button.

Additional tabs are available in the entity setup but these tabs are not required for the custom benchmark setup.
The custom index attributes information is saved in the database in the RULESDBO.CUSTOM_INDEX_ATTRIBUTES table and in the RULESDBO.CUSTOM_INDEX_ATTR_DETAIL table.
The column PINSTANCE in the CUSTOM_INDEX_ATTR_DETAIL table is the column instance in the CUSTOM_INDEX_ATTRIBUTES table.