Custom Liability Index: The Proper Benchmark

Abstract

Most assets are managed versus a generic market index as the objective benchmark. However, the true objective of most investors is to fund some type of liability. Without a custom liability index as the benchmark, assets are usually lost or misaligned versus the proper investment objective, resulting in performance-tracking errors and inappropriate risk–reward behaviors. Quite often, this mismatch of asset risk–reward behavior versus the liability risk–reward behavior results in volatile funded ratios, deep deficits, higher costs, and higher risks to fund the liabilities. Until a custom liability index is installed as the proper benchmark index, investors may be misled as to the true risk–reward objective.