Building Better Benchmarks. Why It Matters. How We Do It.
Global approaches to equity investing have gained momentum over the past few years. As a result of this trend, many institutions are now adopting a full global equity opportunity set as the starting point for their allocation decisions, replacing the traditional domestic versus international partitions. This shift requires a detailed review of the benchmark discussion at the policy and the mandate level.
Why Does the Benchmark Choice Matter? An aggregation of different regional benchmarks—inherited or used by default—may appear to represent the global equity opportunity set. However, this additive approach may result in gaps, overlaps and market drift. More importantly, it may consume tracking error without an investment view. We discuss the advantages of a single global equity policy benchmark with synchronized rebalancing for capturing the global equity opportunity set.
How Does MSCI Build Better Benchmarks? Indices have multiple roles and goals, whether they serve as the basis for various investment vehicles, or are used as asset allocation or portfolio construction tools or as performance benchmarks. Some of these objectives have potentially conflicting implications for building global benchmarks. We explore the numerous subtle, but critical decision points that MSCI makes in creating global indices that are reliable, accurate, investable and transparent.