An exclusion benchmark allows you to exclude segments or constituents from a vendor-supplied index. The exclusion benchmark then recalculates the weights at all levels and the returns above the exclusion level; the returns below are copied from the vendor-supplied index. For example, if the vendor-supplied index is MSCI EAFE, you may require custom benchmarks defined as the MSCI EAFE:
- Excluding one or more segments, such as the UK.
- Excluding one or more segments within segments, such as Consumer Durables within UK.
- Excluding one or more constituents, such as Ford.
- Excluding a combination of the above.
Calculate Weights and Returns
The following logic is used to determine the exclusion benchmark weights and returns when there is an exclusion set:
- Calculate the Total Excluded Weight = (Sum of all of the excluded weights):
Excluded weights = (the newly assigned weight for the segment (0) – the vendor-supplied weight for the segment).
For all excluded segments or securities, and all the segments and securities below the exclusion, the newly assigned weight is zero. - Calculate the New Weights for all remaining (non excluded) nodes:
Weight Change = –1*((Source weight * Total Excluded Weight) / (1 – (Total Excluded Weight * -1)))
New Weight = Weight Change + Vendor Supplied Weight - Copy all the security and segment returns, except those for the excluded level and above, from the source to the target (custom benchmark).
- Calculate the New Returns for the segments above the excluded segment.
Re-proportion the New Weights (calculated in Step 2) to 100 percent for the target benchmark.
Calculate the New Returns: Sum (Return * New Weight) of all the underlying segments or securities.
Exclusion Benchmark Example
For the purposes of example, assume the source index (vendor supplied index) and exclusions listed in the following table.
Dictionary Level | Exclude |
|---|---|
Total | |
Australia | X |
Unknown | X |
Canada | |
Foreign Gov. | |
UK | |
Petroleum | |
Unknown | |
US | |
Capital Goods | |
Technology | |
Petroleum |
Exclusion benchmark data for the source index is listed in the following table.
Perf Rollup Returns ID | Description | ABAL | Return |
|---|---|---|---|
1 | Total | 100.000000000000 | 2.337512614320 |
2 | Total - Canada | 0.186961567780 | 1.167482994596 |
3 | Total - Canada - Foreign Govt. | 0.186961567780 | 1.167482994596 |
4 | Total - UK | 21.654973670853 | 3.475919376493 |
5 | Total - UK - Petroleum | 16.356854652918 | 3.800720520895 |
6 | Total - US | 60.189112766022 | 2.149367889086 |
7 | Total - US - Capital Goods | 16.928285677007 | 0.954101703137 |
8 | Total - US - Technology | 17.933412208518 | 2.922672275580 |
9 | Total - US - Petroleum | 2.960736862858 | 3.768148149908 |
10 | Total - US - Basic Industries | 16.596291716438 | 2.654587081941 |
11 | Total - Australia | 17.968951995345 | 1.607967908012 |
12 | Total - Australia - Unknown | 17.968951995345 | 1.607967908012 |
13 | Total - UK - Unknown | 5.298119017935 | 2.473162531641 |
14 | Total - US - Unknown | 5.770386301202 | 0.968905089765 |
Exclusion benchmark resulting target data is listed in the following table.
Description | ABAL (%) | Return | Exclude | Weight Change(%) | New Weight(%) | Return Recalc | New Returns |
|---|---|---|---|---|---|---|---|
Total | 100.00 | 2.337513 | 100.00 | 2.497320 | 2.497320 | ||
Total - Canada | 0.19 | 1.167483 | 0.04 | 0.23 | 1.167483 | ||
Total - Canada - Foreign Govt. | 0.19 | 1.167483 | 0.04 | 0.23 | 1.167483 | ||
Total - UK | 21.65 | 3.475919 | 4.74 | 26.40 | 3.475919 | ||
Total - UK - Petroleum | 16.36 | 3.800721 | 3.58 | 19.94 | 3.800721 | ||
Total - US | 60.19 | 2.149368 | 13.18 | 73.37 | 2.149368 | ||
Total - US - Capital Goods | 16.93 | 0.954102 | 3.71 | 20.64 | 0.954102 | ||
Total - US - Technology | 17.93 | 2.922672 | 3.93 | 21.86 | 2.922672 | ||
Total - US - Petroleum | 2.96 | 3.768148 | 0.65 | 3.61 | 3.768148 | ||
Total - US - Basic Industries | 16.60 | 2.654587 | 3.64 | 20.23 | 2.654587 | ||
Total - Australia | 17.97 | 1.607968 | X | X | X | X | X |
Total - Australia - Unknown | 17.97 | 1.607968 | X | X | X | X | X |
Total - UK - Unknown | 5.30 | 2.473163 | 1.16 | 6.46 | 2.473163 | ||
Total - US - Unknown | 5.77 | 0.968905 | 1.26 | 7.03 | 0.968905 | ||
Total Excluded Weight | -17.97 |
Complete the following:
- Calculate Total Excluded Weight: 0 – 17.97 = -17.97.
- Calculate the New Weights for remaining (non excluded) nodes. For example:
Total UK Weight Change = 1*(21.65% * -17.97%) / (1 (-17.97 *-1)))= 4.74%
Total UK New Weight = 4.74% + 21.65% = 26.40% - Return for UK is copied = 3.475919.
Returns above the excluded node are recalculated. In the example in the following table, total return only is recalculated.
Description | Return | New Weight | Target Return |
|---|---|---|---|
Total | 2.497319835 | ||
Total - Canada | 1.167483 | 0.23% | 0.002660876 |
Total - UK | 3.475919 | 26.40% | 0.917590893 |
Total - US | 2.149368 | 73.37% | 1.577068066 |
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