Intelligent Indices What makes a good benchmark?

Transcription

1 Intelligent Indices What makes a good benchmark?

2 Copyright Russell Investments All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form other than as delivered in this presentation format, without the prior written permission from Russell Investments. It is delivered on an as is basis without warranty. Russell Investments, a Washington, USA corporation, operates through subsidiaries worldwide, and is a subsidiary of The Northwestern Mutual Life Insurance Company. Russell Investments is the owner of the trademarks, service marks, and copyrights related to its indexes. The Russell logo is a trademark and service mark of Russell Investments. The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected. Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market. The Russell 1000 Index is constructed to provide a comprehensive and unbiased barometer for the large-cap segment and is completely reconstituted annually to ensure new and growing equities are reflected. Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. Indexes and/or benchmarks are unmanaged and are provided for general comparison purposes only. They cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Unless otherwise noted, source for the data in this presentation is Russell Investments. Index benchmark return information is provided by vendors and although deemed reliable, is not guaranteed by Russell Investments or its affiliates. The information, analyses and opinions set forth herein are intended to serve as general information only and should not be relied upon by any individual or entity as advice or recommendations specific to that individual or entity. Anyone using this material should consult with their own attorney, accountant, financial or tax adviser or consultants on whom they rely for investment advice specific to their own circumstances. This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. First used April CORP FINANCIAL PROFESSIONAL USE ONLY

3 When should you review your benchmark? As part of your periodic strategic review process When there is a substantial change in circumstances Internal External recent market events have caused many investors to review their attitudes towards risk, and even active management.

4 Total Standard Deviation, % Mar-00 Sep-00 Global Volatility is Still High Global Markets: 3-year rolling volatility Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Russell Developed ex-u.s. Russell 3000 Russell Emerging Markets Source: Russell Investments. All correlations and volatilities are measured on the basis of rolling 36-month performance, unless otherwise noted.

5 Sectors are driving performance more than countries Sector factor Country factor Dec-1998 Dec-1999 Dec-2000 Dec-2001 Dec-2002 Dec-2003 Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Source: Russell Investments. From a multi-beta model based on Russell Global country-sector indexes.

6 Market indexes are intended to represent a defined stock market and thus track the market's changes over time.

7 Performance Benchmark Asset Class Proxy Trading Vehicles To measure an active portfolio s exposure and performance to market opportunity set. To represent characteristics of asset classes without the influence of active management. To provide generic stock baskets for passive management and/ or derivatives.

8 Return Why is choosing the right benchmark important? You Risk

9 Percent of portfolio Active Management creates overlaps ,000 10, ,000 1,000,000 Market Capitalisation $millions (log scale) Small Cap Mgrs Large Cap Mgrs Source: Russell Manager Large Cap Universe & Russell Manager Small Cap Universe

10 Percent or adds alpha by taking off-benchmark bets Average allocation to Emerging Markets by Developed Market managers Source: Russell Developed Manager Universe

11 Characteristics of desirable benchmarks 1. Completeness 2. Investability 3. Objectivity 4. Transparency 5. Availability of passive vehicles with low costs

12 Potential trade-offs 1. Completeness vs. Investability 2. Objectivity vs. Subjectivity 3. Rebalancing frequency vs. Turnover

13 Summary Choice of benchmark is a critical decision in the investment process Recent market turmoil has prompted many investors to review their risk tolerance Globalization has created a new investing environment Investors should understand the characteristics of a desirable benchmark and the potential trade-offs in their construction.