Appropriate benchmarks and investment return targets are selected for use in analysing the performance and risk of the investing institution’s investments, whether managed internally or externally.
Guideline code
INVEST_01700
Mechanism
Mechanism
- Management should evaluate, monitor and review the performance of the total portfolio. Performance should be considered against the projected evolution of assets and liabilities and with reference to the investment mission and goals.
- The management should evaluate, monitor and review the internal and external fund managers to ensure that performance, risk and cost of fund management services are within the prescribed standards and benchmarks.
- A minimum rate of nominal or real return on the portfolio may be established to ensure the financial viability of the programme (the so-called actuarial hurdle rate) and/or ensure the sufficiency of accumulated member accounts, if applicable, for the contingencies covered by the social security institution.
- If benchmarks are used for assessing managers and asset classes, they should possess the following characteristics:
- Clarity: the index construction rules and constituents should be known and clearly defined;
- Completeness: the index should have broad, diversified coverage of the securities available for investment in the asset class;
- Be investable and verifiable: where possible, the constituents of the index should be tradable – i.e. having a relatively liquid market with regular pricing – or published (e.g. the Retail Price Index);
- Be independent and produce regular data: ideally, indices should be calculated regularly by independent providers and available historically to enable managers to understand the characteristics of the index.
- Public market indices or peer group indices may be relevant for assessing mandates or asset classes where relative performance and risk measurement is relevant.
- Absolute return benchmarks may be relevant for assessing the performance of mandates which do not have a relative performance and risk objective or where there is no appropriate index in the asset class or territory in question. An absolute return benchmark may be more appropriate for social security institutions which have funding and financing objectives related to cash flow requirements or required minimum returns to be credited to provident fund accounts.
- The management or investment committee should consider the use of alternatives to market capitalization weighted indices where relevant. An example is fundamentally weighted indices which use metrics such as revenue rather than market value to determine the relative weighting of constituents and which may offer a better measure of return and risk for selected mandates.
- Where the board, management or investment committee lacks sufficient resource, expertise or governance budget for benchmark design, the board, or the management or investment committee with board authorization, should seek expert advice or appoint external professionals to carry out these functions.
Parent
Structure
Structure
- The management or investment committee should propose, and the board should approve, benchmarks and targets to be used to assess the performance and risk of the investing institution’s investments.
- Appropriate benchmarks should be selected for each investment mandate and each asset class considered by the management or investment committee for performance and risk analysis. An appropriate benchmark or target return should be selected for the total portfolio which is consistent with the benchmarks and targets used for individual asset classes.
- Benchmarks and targets should be relevant for the type of investment mandate and asset class to be assessed.
Title HTML
Guideline 14. Selection of appropriate benchmarks
Type
Guideline_1
Weight
21