Benchmarks and indices

Benchmarks and Indices

As investment professionals, we should be aware of the strengths and limitations of the indices we use as benchmarks. We have to ensure that they are relevant and meaningful to our clients.

Indices and benchmarks play important roles in describing the performance of markets and in describing the performance of investment products.Recent scandals in the fixed income, currency and commodity markets showed how indices can be abused and the impact that has on market integrity. In light of these events, it is important to return to first principles to appreciate why benchmarks and indices are useful tools and to ensure that they are used appropriately. It is critically important that the development of indices and benchmarks is properly governed and that, so too, is their subsequent operation and application.

This is particularly important at a time when there is rapid growth in the development of passive products based on indices and when there is a proliferation in the range of indices available against which to construct investment products.

The diversity of available indices makes it even more important for the profession to ensure that it can assess the merits of indices accurately and that it can assign the appropriate benchmark to meet a client’s requirements. Clients, too, need to be conscious of the characteristics of good indices and benchmarks so that they can also contribute to market discipline in index and benchmark development, selection and use. Robust due diligence in relation to index construction and governance and benchmark selection and use is valuable throughout the investment value chain.