Question

In 300 words, describe the difference between managing assets against and benchmark or managing assets against liabilities.

Answer 1

1. Managing assets against benchmark

While managing assets against benchmark the strategy will be to beat the benchmark returns.

For instance if a portfolio manager is managing assets against the benchmark of the S&P 500, then the returns expected by the investor will be a minimum of the S&P 500 , but in all likelihood wanting the investor to go above the benchmark, and beat the returns provided by the S&P 500.

In fact he should beat the benchmark index , at least to the extent of his management fee, so that the investor makes a gain over and above what he might have ordinarily expected to achieve.

Expected return = Benchmark return + Management Fee

2. Managing assets against liability

In cases where the manager is expected to manage the fund against a liability the goal changes slightly. The goal of the investor is to beat the liability cost , and the managed portfolio should provide returns to cover the cost of liability, plus the management fee.

So in this case:

Expected return = Cost of funds (liability) + Management fee