Understanding indices and benchmarks

Understanding indices and benchmarks

The National Association of Pension Funds (NAPF) has published a guide to help pension funds get to grips with indices and benchmarks and how best to use them. This guide is the latest addition to the NAPF’s made simple series. It looks at how indices work and how they can be used by pension funds when looking at their investment strategies, whilst demystifying jargon such as ‘smart beta’.

Joanne Segars, chief executive, NAPF, said: “Pension funds have a huge responsibility over the assets of their scheme members and using indices and benchmarks can be a valuable way of measuring and comparing performance against a range of external factors to ensure the investment strategy is on track.

“But over a relatively short timeframe indices have evolved significantly to become a series of far more complex and sophisticated reference points designed for a multitude of purposes and outcomes. This can be both useful and deeply complicated for pension funds, which is why we are pleased to add this guide to our made simple series.”

Typically indices are used by pension funds as a measurement tool - as a benchmark for measuring market performance or as a gauge of how a portfolio manager’s investments have performed against an index. But indices have evolved significantly over recent years and today they can be used in a number of different ways and for a series of varying purposes.

Shamindra Perera, head of UK institutional at Russell Investments, commented: “Indices and benchmarks are an important element of a pension fund’s toolkit. What began as basic measures of broad market performance against which actively-managed investments might be measured, have evolved to also provide a remarkable range of options to investors seeking different exposures and approaches to risk management.”

“As indices continue to develop, Russell feels it is important for investors to understand what it is they are choosing, and exactly how they intend to use it. In working with the NAPF to produce this guide, our aim is to help support trustees and pension managers do just that and gain a better understanding of these essential investment tools.”

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