Choosing an appropriate benchmark is vital for a successful outcome.
Every Client is Unique
Every client is unique, but in common is their need to be treated uniquely. Some of our clients have asked us to work with them to develop bespoke credit benchmarks that help them to avoid inefficiencies in traditional ones.
Traditional Credit Benchmarks
Traditional credit benchmarks were built under the same methodologies as equity benchmarks, i.e. weighted by market capitalisation. This weighting is not necessarily a problem for equities, but for credit it sometimes forces fund managers to increase holdings in specific sectors (e.g. financials) that are issuing greater debt. This can be counterproductive.
Bespoke benchmarks allow clients to avoid this inefficiency: the credit universe is dissected in such a way that avoids such concentrations and seeks to ensure the tradability of the portfolio. Bespoke benchmarks can also be tailored to take account of scheme-specific considerations, such as sector risk and duration targets, and as a result can be far more efficient than standard benchmarks.
Real World Solutions
At Redington we have designed a bespoke credit benchmark for a leading financial institution pension scheme. We have also successfully selected and instructed managers on behalf of clients investing in credit, using bespoke benchmarks.