The bespoke composite framework in Performance Watcher aims to simplify defining, rebalancing and computing index allocations, making them available for use in platform analytics and internal reporting. After agreeing on the asset allocation at an appropriately granular level, as well as underlying indices and terms and conditions, we generate a backtest and start the daily flow.
Since it is integrated into Performance Watcher, the indices are available in all the platform analytics. And hence can be used to compare portfolios with the same reference currency and risk level daily.
Defining Index Composites
As an overall principle, the index composite is meant to be the passive allocation reflecting your investment style. Any decision that moves significantly away from it is an active risk, such as reducing the equity allocation or implementing an active currency overlay strategy.
We do not allow modification for three years if used in reporting or for client discussions. Performance Watcher’s mission is to provide transparency for asset owners, and helping asset managers provide such transparency is a cornerstone of that aim. Changing indices when it suits the manager does not help the consistency of the communication that a client requires. Also, for managers not reporting under GIPS, we ask that both the composites and the PW indices be present.
Explanation of weight and index tables
The first step is to define the granularity of the index by asset class. The aim is always to balance details with common sense. as one becomes more specific, the ability to manage against it becomes more constrained. An index is aimed at giving a broad view of the « neutral » asset allocation. If, for example, equities are sliced by value and growth factors or by sectors, then the assumption is that the portfolio will include these factors. Whereas a broader allocation framework, like global all-country indices, the manager has free hands as he won0t be expected to have 9000 stocks in his portfolio…
The next step involves deciding which indices are hedged into the reference currency. Typically bond indices are hedged, and equities are not.
Finally, neutral weights are defined for each risk allocation and reference currency, and a rebalancing rule (monthly/quarterly/bi-yearly/every odd month…) is agreed upon.
You can then agree on the indices to be used in client reporting. In the affirmative, as set or rules have to be agreed upon. The allocation set then moves to production.
Production
Once the allocation and terms have been signed off, the backtest is generated. The history is added to PW, and the daily flow will start. The indices appear in your ecosystem, and you can handle them in your admin platform. In particular, risk levels are defined and can be assigned as a benchmark for Perfometer analysis.
Every month, you will receive an excel file with daily, monthly and yearly performances and a statistical page. Note that you have access to the details of each composite index but not the underlying indices due to data redistribution rules.
Summary
Our new offering allows for a cost-effective and automated bespoke solution to maintain and audit internal benchmarks. Since the composite indices are embedded in the Performance Watcher platform, they are available daily for all your analytic needs. We look forward to discussing its features in due course.