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Figure 5. Breakdown of MSCI Indices. Source: MSCI Presentation.
To be able to select the right benchmark, it is essential to know the strategic view of the pension fund.
For example does it believe in strong sector bets, a value strategy, or momentum trading? When the
strategy of choice is a value strategy, it is logical to measure a manager’s performance against a value
benchmark as well.
GBF believes in a core strategy divided by region. A core strategy means that investments are
made in all types of stocks without favouring, among others, value, growth, small cap or large cap
stocks and without momentum trading. In other words a well diversified broad market portfolio is
created. Which makes up for 98% of the market equity investable universe, as can be seen in figure 5.
Next to the core strategy the world is divided into the six regions already mentioned in
subsection 3.2.1. The benchmark representing this strategy is a regional Investable Market Index, a
combination of the Small, Mid and Large Cap Indices. By using the predefined IMI index all of the six
conditions for a good benchmark are met as is summarized in Text box 3.
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Unambiguous: The underlying assets can be accessed and the turnover is low.
Investable: The MSCI indices only contain liquid stocks.
Measurable: The indices are quoted on an ongoing basis.
Appropriate: A Core Strategy is adopted; an investable market index is a good match with this strategy
since it represents an investment in a broad market portfolio.
Reflective of current investment opinions: Since the market indices are regional, and linked to the
region in which the manager operates, he should have an opinion on the assets of the benchmark.
Specified in advance: All the indices already exist for at least ten years with starting dates ranging from
1969 to 1998.
Text Box 3. Benchmark characteristics.
Since the performance of the managers should be based on beta returns increased with as much alpha
as possible5, the payment is based on that assumption as well. To make sure managers stick to their
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While staying within the restrictions or guidelines as outlined in the IMA.
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