Wednesday, August 10, 2011

Benchmark changes ... when to make them

 Let's say that you have a balanced portfolio, and you've selected the S&P 500 to represent the equity portion, and the Barclays Agg for the bond side. Your strategy for the portfolio is 80% stocks, 20% bonds, thus your index is blended in the same fashion (i.e., 80% S&P, 20% Barclays).

Because of the challenges in the stock market you've decided to move more money into bonds, reducing your exposure to stocks to just 40%. And so, your portfolio now looks like 40% equities / 60% bonds. Do you alter your benchmark accordingly? That is, should you alter the balance of the two indexes which represent the benchmark?


And why not? Because this change is a tactical move, brought about by your belief that such an adjustment will be good for your client, given what's going on in the market. If you adjust the benchmark, you won't know if this was good or not. By keeping the benchmark aligned with your long-term strategy (80/20), this temporary shift allows you to see if it was good or bad.

Make sense?


  1. Could not agree more. This has been a long debate between the static vs dynamic benchmark crowd. Just because someone designs software to allow for dynamic, that does not make it appropriate.

  2. Makes sense!! I like the insight on this post.

  3. Todd, thanks for your comment. Good points about the static/dynamic aspects of software.

  4. Thanks, Katie! Hopefully others do, too!

  5. 100% agree with your comments David. Over the years, I have had many discussions with colleagues about this. I have always felt the benchmark should remain as is.

  6. David,
    I completely agree.
    A fund's benchmark should be an investable mandate against which the fund is measured. It is the PM's job to beat the benchmark's return and risk. How that is done has no effect on the mandate itself.
    Changing the benchmark to follow the evolution of the fund destroys the purpose of the benchmark as the mandate against which the fund is to be measured.

  7. Thanks, Andre! I always like it when we agree.

  8. Thanks, Jed. This post has obviously resonated w/lots of folks.


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