Are you ever unsure what benchmark to use for a specific product? Several times we get the question as to which benchmark would be appropriate or the "correct" benchmark to run versus a manager. Well, we have a few solutions for you within StyleADVISOR:
- Manually add the Market Benchmark and look at specific benchmark relative statistics such as R-Squared, Tracking Error, etc.
- Run Returns-Based Style Analysis to build a blended benchmark
- Use our template, Find Best Published Benchmark for a Manager
I'm going to discuss option three. We have a template called Find Best Published Benchmark for a Manager. There is some logic behind this approach, however. When comparing your manager to the indices, it’s important to use indices that make sense with the product, i.e. you don’t want compare an equity product to fixed income indices.
How does it work? Well, once you've selected the template, you will be asked to choose a manager to compare. This is the manager you are looking to find the benchmark for. You can either select from the dropdown or click the Select button to choose a manager from our databases. After clicking Next, you will select the list of indices to compare. You can either Select All (not suggested) or click Select to choose the list of indices from our index databases. Again, make sure you select indices that are relevant to your manager. Once you've selected that list, click Next and choose dates and frequency. Finally click, Finish.
The indices will populate in our Search Table, and you will see four fields, R-Squared, Tracking Error, Begin Date and End Date. From this, if you're looking for the best fit benchmark you want the index that has the highest R-Squared and lowest Tracking Error. To sort, you can click on the field at the top. However, it's important to be cautious and use your judgment when looking at the results. It’s possible an index may have a high R-Squared with low Tracking Error purely by chance, which is referred to as spurious correlations
. This tends to happen with shorter time periods. It’s just something to be wary of and choosing indices that make sense off the bat can help with this. Below is a screenshot.
The template is easy get to as well. Once you open StyleADVISOR, you will see the Task Manager. From the Task Manager, you want to make sure you are under the New Analysis tab. Under the folder, Zephyr Defined Tasks, choose Find Best Published Benchmark for a Manager. Below you can see where to obtain the template.
If you have any questions, feel free to contact our Product Support Team at (800) 789-5323 or email firstname.lastname@example.org