Set out what makes a sound benchmark and defend the choice of a particular benchmark
The idea
A valid benchmark is unambiguous, investable, measurable, appropriate to the manager's style, reflective of the manager's current investment opinions, specified in advance and owned by the manager. For a bond mandate the key test is fit with the client: the benchmark's duration, credit quality, sector mix and currency should mirror the client's objectives and risk tolerance, and a liability-driven investor's benchmark should resemble its liabilities rather than a broad market index. Bond indexes change shape as issuers lengthen or shorten maturities, so a broad index can drift away from what the investor needs. A good justification links the benchmark's duration and credit profile to the client's horizon and tolerance. The trap is choosing the broad aggregate index by habit.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Liability-Driven and Index-Based Strategies
- Assess ways of funding one future liability with a bond portfolio
- Contrast approaches to one liability with approaches to a schedule of liabilities, and the different ways each can be implemented
- Assess liability-driven strategies across a range of interest rate scenarios and choose the one that best meets the portfolio's goals
- Explain what can go wrong when a portfolio is managed against a set of liabilities
- Explain how bond indexes are built and why managing a portfolio to track one is hard
- Contrast the ways an investor can take on passive exposure to bond markets