1. What Is My Benchmark Telling Me?
A Guide to Investment Performance Benchmarks

3. 1
What Is My Benchmark Telling Me?
Charitable remainder trusts allow donors to achieve their philanthropic goals while
also receiving income during their lifetime. Upon the donor’s death, the remaining
asset value is transferred to the charitable remainder beneficiary organization.
Donors are often concerned with the level of income they receive during the
term of the trust, while the charity’s long-term interest is in the remainder value.
Given this “split interest,” the objective for managing a charitable remainder
trust investment portfolio is often a combination of growth, to help maximize the
remainder value of the gift, and income, to support the recurring payments to the
beneficiaries. In order to meet these objectives, most planned giving portfolios
include both equity and fixed income securities.
Selecting a benchmark for a portfolio that invests in a single asset class is
relatively straightforward. For example, a portfolio invested in U.S. small cap
stocks should be benchmarked against the Russell Small Cap Index, which tracks
the universe of domestic small cap stocks. The performance of a portfolio of
emerging market debt should be measured against a broad index of emerging
market debt, such as the JP Morgan Emerging Markets Bond Index. For a multi-
asset class portfolio, however, the construction of a customized benchmark
requires additional consideration in order to capture the performance of the
manager in each asset class as well as decisions about how to allocate capital
across various asset classes.
Your trust’s investment portfolio outperformed its benchmark by 1.5% in the most
recent period. Terrific performance, yes? Maybe. It depends on whether a given
benchmark is appropriate for a portfolio’s investment strategy and allocation.
Investors in today’s environment must establish and construct their benchmarks
with care. While there is no single best approach to constructing a benchmark,
investors need to understand what questions can be answered—and what
questions can’t—by comparing investment performance to a benchmark.

4. 2
What Is My Benchmark Telling Me?
According to the CFA Institute, there are a few guidelines that should be observed
in the benchmarking process. First, the benchmark should be established before
the start of the investment period. Allowing a portfolio manager to select a
benchmark at the end of the period would permit the choice of a benchmark
showing the most favorable comparison. Second, the benchmark chosen
should be appropriate for the portfolio management style and reflect current
investment options. If the portfolio manager will be investing in large and small
cap stocks, then the S&P 500 index would be a poor benchmark, as it captures the
performance of only large cap stocks. Selecting a benchmark not aligned with the
investment allocation reduces the ability to measure the success of the portfolio
manager’s decisions. As we will discuss shortly, different indices should be
combined in a way that captures what the institution would like to measure. Most
importantly, the portfolio’s benchmark should be clearly understood by both the
investment manager and the investor or institution.
A benchmark for a multi-asset class portfolio combines several market indices
and weights them to create an aggregate blended benchmark for measuring the
performance of the entire portfolio. A key consideration is the degree of specificity
in the benchmark to capture both asset classes and sub-asset classes. One
choice is to construct a benchmark from indices that capture broad asset classes,
i.e., equity, fixed income, and alternative investments. If your portfolio’s equity
component beats its equity index over a long time period, then the manager can be
credited with good asset allocation decisions within the broad equity asset class.
Alternatively, the benchmark could combine indices that measure “sub-asset
classes”—large cap equity, mid cap equity, small cap equity, emerging market
equity, etc. Combining a larger number of indices permits measurement of the
performance of each constituent part of the portfolio, i.e., “How did the Emerging
Markets Debt manager do relative to the Emerging Markets debt index?”
When selecting the underlying indices it is important to bear in mind how each
index is constructed. There are two primary ways indices are constructed—
market capitalization weighted, and price weighted. A market-cap weighted
index will be skewed towards the performance of the largest capitalization
companies in the index. So in today’s S&P 500 index, the performance of the
index’s largest market cap stock, Apple (AAPL), has a greater impact on the
performance of the index than a smaller market cap stock in the index. A price-
weighted index, such as the Dow Jones Industrial Average, weights its constituent
stocks based on their prices. For example, a Dow stock trading at $50 has five
times the weight of a $10 stock.

5. 3
What Is My Benchmark Telling Me?
Key Considerations for Some of the Most Widely Used Indices
Standard & Poor’s 500 Index
This is a market-value weighted index that comprises 500 large cap U.S. stocks.
Pros: Familiarity of the index. It is easy to purchase low-cost funds that track the
index’s performance.
Con: Does not include small cap stocks.
Dow Jones Industrial Average Index
This is a price-weighted index composed of 30 large cap primarily manufacturing
companies.
Pros: Familiarity of the index, ease of access to performance data, long history
dating back to 1928.
Con: The index is not an accurate representation of the broader economy or stock
market.
MSCI All Country World Index
A market-cap weighted index comprising large, mid, and small cap stocks across
the U.S. (45% of the index), developed international countries (38%) and emerging
markets (17%).
Pros: Single index solution for an equity portfolio that invests around the globe.
Investors can purchase ETFs tracking the index for low relative cost.
Cons: The owner of the index, Morgan Stanley, charges licensing fees to see the
index components. The index may not be in line with the portfolio manager’s equity
asset allocation.
Barclay’s Capital Aggregate Bond Index
Market cap weighted fixed income index of investment grade securities.
Pros: Provides broad representation of the fixed income market, recognized as the
primary U.S. fixed income benchmark by most investment professionals.
Cons: The index does not include municipal bonds, Treasury Inflation-Protected
Securities (TIPs), or below investment grade securities.

6. 4
What Is My Benchmark Telling Me?
To measure the effectiveness of asset
allocation decisions, hold index weights
constant in your benchmark. There
are two primary ways to weight the
underlying indexes in the benchmark.
One approach is to adopt a static
policy benchmark. The other approach
allows for dynamic reweighting of the
underlying indexes.
With a static benchmark, the weighting
of each of the constituent indices is
held constant at the level reflecting
long-term targets for the investment
of the portfolio. This approach allows
you to measure the effect of asset
allocation decisions within the portfolio.
For example, if the investment
manager has maintained an overweight
allocation to U.S. large cap equities
relative to the policy benchmark and
U.S. large cap equities outperformed
other asset classes, the comparison
to the benchmark would capture this
outperformance. One drawback to this
approach is that it may prove difficult to
identify whether portfolio performance
is due to asset allocation decisions or to
the performance of specific managers
within the overall asset allocation. However, assuming the investment manager
is making both asset allocation and fund manager decisions, a static benchmark
holds the manager accountable for all decisions and reflects the total value the
manager is providing the institution.
The other benchmark approach reweights the indices dynamically as of the
beginning of each measurement period. This approach allows you to measure
the effectiveness of the active managers chosen for each segment of the overall
portfolio. The impact of active asset allocation decisions made by the portfolio
manager is eliminated from the comparison between portfolio performance and
benchmark performance. This approach helps organizations that utilize actively
managed mutual funds to identify if the active managers of their mutual funds
have performed well.
Conclusion
Comparing portfolio performance results to a benchmark is inevitably a
shorthand measure. Whatever the difference between the portfolio and the
benchmark performance, you should ask, “Why did the portfolio perform
this way?” If your portfolio outperformed its benchmark, did the investment
manager take more risk than the benchmark? Did active management help
or hurt performance? Did wise asset allocation decisions generate the
outperformance? Conversely, in periods of underperformance, you want to
know whether asset allocation drove the outcome, or whether a high cash
position due to a large gift receipt in the period created a drag on performance.
Finally, don’t forget that managers should be evaluated over longer time periods
than a single quarter or year. Investment styles go in and out of favor depending
on financial market conditions. Investment managers should be evaluated over
a complete market cycle.

7. What Is My Benchmark Telling Me?
5
About the Authors
Sally L. Rubin, CFA
Director, Planned Giving Investments
Sally Rubin is the director of investments for BNY Mellon Wealth Management’s
Planned Giving group. In this role, she oversees the overall investment process,
including asset allocation and execution decisions, as well as the portfolio officers
who are managing clients’ investment portfolios.
Sally joined the firm in 2011. Previously she was with Frontier Capital Management
for 12 years as a partner, co-portfolio manager and equity analyst. Before that, she
worked as a business strategy consultant at Telesis, a Towers Perrin Company.
Sally received a bachelor’s degree from Harvard University and both a master’s
degree in music and a master of business administration from Yale University. She
is also a CFA charterholder. Sally has 18 years of experience as a board member
for non-profits such as the New England Conservatory of Music (NEC), Celebrity
Series of Boston, Yellow Barn Music School and Festival and Emmanuel Music. At
NEC she is past chair of the Board of Overseers, as well as a member of the Board
of Trustees, Executive Committee, Investment Committee and Finance Committee.
For the past nine years, Sally has been the sole outside trustee of a private
foundation that supports cultural, environmental and public policy initiatives.
Brandon Parrish, CFA
Investment Officer
Brandon is a portfolio manager for BNY Mellon Wealth Management’s Planned
Giving group. In this role, he works directly with clients to address their investment
management needs.
Brandon joined the firm in 2012 and has eight years of experience in the financial
services industry. Prior to joining the firm, Brandon worked at State Street
Corporation in their Global Markets division.
Brandon received a bachelor’s degree from Roger Williams University and a
master’s degree in finance from Boston College. Brandon is a CFA charterholder
and a member of the Boston Security Analysis Society.

8. This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has
been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive
explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or
appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.
BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.
©2014 The Bank of New York Mellon Corporation. All rights reserved.
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