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November 5th, 2020
By Sanjoy Chatterjee, Chief Strategy Officer
Plan sponsors manage their plans within the guidelines set by their investment policy statements, asset allocation mandates and funding requirements. Every plan is unique, and it is imperative to have appropriate benchmarks both for comparing performance and for making effective investment structure decisions. While every plan has an appropriate policy benchmark defined for absolute comparison purposes, plan sponsor universes offer asset allocators an insightful alternative. A total asset-pool level benchmarking metric augments their investment decision process by comparing their plan performance and asset allocation with like peers.
Plan level performance has many facets. There is a mix of various asset classes that consist of long-only and alternative investments, and allocations vary over time. Simple reliance on the relative performance of the plan versus its policy benchmark may not be sufficient for effective benchmarking. Asset allocators can benefit from supplementary plan sponsor universes that support robust benchmarking. These enable asset allocators to sharpen their plan-level performance and asset allocation analysis by delving into the factors that drive differences.
Additionally, knowing where institutional money is flowing in an ever-changing market is critical for any asset allocator. They can apply it to quickly gauge overall market performance and identify shifts in allocation trends and sources of risk exposure. Doing so across peer groups and relative to the policy index provides unparalleled insight that helps them better manage their asset pools.
Let’s use an example: Your $500 million endowment is outperforming or underperforming the appropriate plan-level policy benchmark. Understanding how the total plan performance ranks relative to peers provides an insightful alternate frame of reference. Your plan may outperform the policy benchmark but rank below the median when compared to the appropriate plan sponsor universe. Or, it may underperform but rank in the top quartile within the appropriate plan sponsor universe. These are both relevant and actionable insights. This added perspective provides objective information you need to take a deeper look at the factors and drive appropriate outcomes.
More precise and relevant peer benchmarking obtained using plan sponsor universes may cast your performance in a more favorable light. It can also provide alternate perspectives for managing future performance and asset allocation decisions. This closer look offers valuable insight you require for making informed decisions on when and how to take action.
It’s difficult to identify engine problems without looking under the hood. And it’s difficult to understand the comparative performance of an asset pool comprised of multiple asset classes without looking deeper into the data. Using a robust peer universe of truly similar sponsor and plan type provides you with an alternate lens to review total plan performance comparisons. Plus, it enables you to discover potential performance issues—and identify the drivers behind them.
What are your peers doing differently?
When you look more closely, you may uncover systemic issues in your approach. Where do you stack up on asset allocation? What are the drivers of your peers’ performance? When you understand the “why” behind variations in performance, you’re better prepared to determine whether adjustments to your plan may be warranted and if so, the kinds of adjustments you might need to make.
Every plan is unique. Comparing plans of vastly different asset sizes or sponsor types or underlying asset allocation is like comparing apples to oranges. There are too many variables. The same is true for plans that operate under significantly different investment policies. For valuable insight, benchmarking comparisons must be based on plans with similar attributes. Otherwise, you cannot glean meaningful insights.
Policy benchmarks are often so broad that they fail to provide insights to the drivers of the plan performance. Robust plan universes offer true peer-benchmarking solutions that are relevant across all investment asset pools. Using plan universe data with appropriate constraints provides relevant supplementary insights into plan performance to inform future investment decisions.
A robust plan universe data set should offer both net and gross performance, as well asset allocation and key risk metrics. It should have historical universe data and allow for period to period analysis so users can spot trends in performance and asset allocation.
Learn why Investment Metrics Plan Universe is the industry standard for plan sponsor peer-group performance benchmarking. With data and plan coverage 2x to 6x larger than other offerings in the market, it can help you gain unparalleled insights.
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