D-PIMS Portfolio “Benchmarks”

What is a Benchmark ?

An investment benchmark is a yardstick for comparing and evaluating the investment return on a portfolio. Based on the objectives of the portfolio, the investment benchmark is a basket of investment assets appropriate for the risk of the portfolio in question.

How do we create the Benchmark ?

To explain how we arrive at the benchmark it is necessary to first explain how the D-PIMS Portfolios themselves are created. To do this we use portfolio modelling software to produce an optimal allocation for each identified level of risk.  Specifically this is the Global CAP:LINK stochastic investment model developed by Tillinghast-Towers Perrin, a respected international actuarial consultancy.

The software utilises historical data concerning economic drivers, volatility of different assets classes and cyclical patterns of returns along with both implied and expert future market forecasts to estimate the possible future returns of each asset class. From this a range of likely returns and the potential variability of these are used by the software to formulate “optimal” multi asset portfolios based on risk.

This creates a “model portfolio” however it is our belief that this is often too “theoretical” and frequently fails to take into account short term variations to the model outlook. For example since we launched D-PIMS the model has suggested allocations to some sectors that at various times we have felt it was not appropriate to invest in.

The Benchmark quoted then is the model portfolio created by the software, whereas the actual D-PIMS Portfolios are adjusted to take account of short term factors and our opinion of how markets will develop. Our D-PIMS performance frequently improves on the model as we take a more short term view on asset allocation. We can afford to do this because of the frequency we monitor and review the D-PIMS Portfolios. It is the fact that we make these frequent asset allocation changes that is creating, usually, significantly better performance than the Benchmarks

Why do we use a Benchmark ?

The purpose of showing the benchmark as a comparison is to highlight the value we can deliver in tailoring asset allocation to current investment conditions and our skill in selecting funds to outperform the sector average. Of course it also provides a useful measure for yourselves of how D-PIMS is performing, as you can clearly see whether we have outperformed or underperformed the benchmark.

Have you always used a Benchmark ?

No, we previously showed for comparison the performance of the sector averages based on the D-PIMS Portfolio asset allocation. This only showed the out performance or under performance of the D-PIMS Portfolio generated from our individual fund selection, and so ignored the asset allocation decisions made for the D-PIMS Portfolio. In light of this it was felt that a more realistic benchmark should be used, so that the effect of our asset allocation decisions could be seen as well.

 

Please note that D-PIMS for Pensions has only been available since late 2007, however the Portfolios mirror our Investment Bond Portfolios that have been available since October 2004 allowing us to produce the theoretical past performance shown.

The value of investments can fall as well as rise. Past performance is no guarantee of future performance.