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Portfolio and Asset Class Benchmarks
Benchmarks provide the standards against which investment performance is measured.
An ideal benchmark is (1) clearly defined; (2) representative of the targeted strategies,
opportunities, or activities; (3) investable; and (4) measurable. Good benchmarks meeting
these criteria are available for virtually all traditional asset classes. Such is not
the case for alternative asset classes, where benchmarks are not available. Instead
return objectives (an absolute return of 8 percent, for example) or manager universes
(available from consultants, custodians, or third-party providers) usually serve as
benchmarks for alternative asset classes.
At the total endowment level, it is not uncommon to have several benchmarks-all of
which should correspond directly to financial and investment objectives. Often three
types of benchmarks-all conveying valuable but different information-are used at the
total portfolio level:
- Spending rate + inflation. This benchmark measures the financial
objective of most institutions: maintaining the real or inflation-adjusted value of
the endowment. Achieving this goal is critical to safeguard the purchasing power of
the endowment. A real growth component of 1 percent or so is sometimes added.
- An average of the benchmarks of each asset class weighted by the target
allocation stated in the investment policy. Comparing actual performance with
this benchmark conveys whether an investment policy is being implemented effectively.
- Peer performance. Comparing actual performance with a peer group
reveals whether the institution is maintaining a competitive financial position. Peer
benchmarking will also show if an endowment is being too aggressively or too
conservatively managed. Institutions with investment performance that consistently
outperforms its peers may be operating with relatively high levels of risk. At the
other extreme, endowment performance consistently underperforming may be managed too
conservatively.
A good investment policy should change infrequently. Benchmarks for individual
managers should not be included in the investment policy, because determining proper
manager benchmarks is more of an implementation task, not a policy issue.
Checklist Questions
- Does your institution's investment policy state clearly the benchmarks to be
used to evaluate investment performance?
- Are benchmarks assigned for each asset class?
- Do the benchmarks include comparison with an appropriate peer group of
institutions?
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