benchmark

Chapter 5Performance benchmarks for institutionalinvestors: measuring, monitoring andmodifying investment behaviourDAVID BLAKE AND ALLAN TIMMERMANNABSTRACTThe two main types of benchmarks used in the UK are external asset-class benchmarks and peer-group benchmarks. Peer-group trackingis much more prevalent with pension funds and mutual funds than withlife funds. However, the use of customized benchmarks that reflect thespecific objectives set by particular funds is increasing. Benchmarksinfluence the type of assets selected and, equally significantly, thetype of assets avoided. Peer-group benchmarks have a tendency todistort behaviour, particularly when combined with a fee structure thatdoes not promote genuine active management. The outcome tendsto be herding and closet index matching.The main alternatives to peer-group benchmarks are: single-indexbenchmarks with time-varying coefficients, multiple-index bench-marks and fixed benchmarks. The first two alternatives have recentlybeen discussed in the academic literature but have yet to catch on inthe practitioner community.There are also benchmarks based on liabilities. These are generallyrelated to real earnings or consumption growth or to the discount rateon liabilities. Explicit liability-based benchmarking is currently not verycommon, but is likely to become so in the light of both the increasingmaturity of pension funds, various regulatory and financial reportingdevelopments, and the Myners Review ...