S&P: Traditional, Long Only Benchmarks the Most Appropriate for 130/30 Strategies

NEW YORK, April 14 /PRNewswire/ -- With interest in 130/30 funds growing in the investment community, Standard & Poor's, the world's leading index provider, issued a research paper today determining that traditional, long only market benchmarks, such as the S&P 500, are the most appropriate benchmarks for these strategies. The research paper, Benchmarking 130/30 Strategies, can be accessed in full by going to http://www.standardandpoors.com/indices, and clicking on strategy indices in the left navigation tab.

In making its determination, Standard & Poor's points to six widely-cited, key principles of a good, relevant benchmark(1):

-- Unambiguous: The names and weights of securities constituting the benchmark are clearly delineated. -- Investable: The option is available to forgo active management and simply hold the benchmark. -- Measurable: The benchmark's return can be calculated on a reasonably frequent basis. -- Appropriate: The benchmark is consistent with the manager's style. -- Reflective of current investment opinions: The manager has current investment knowledge (be it positive, negative, or neutral) of the securities that make up the benchmark. -- Specified in advance: The benchmark is constructed prior to the start of an evaluation period.

"Long only market benchmark indices, in Standard & Poor's opinion, meet the key principles required of a good, relevant measure for 130/30 strategies," says Srikant Dash, Head of Global Research & Design at Standard & Poor's Index Services. "While 130/30 strategies are structurally different from traditional long only managers, they are simply another active management strategy in the same asset class. Therefore, the benchmarks should be no different."

In its research, Standard & Poor's discusses three main reasons why traditional, long-only benchmarks such as the S&P 500 are the most appropriate for gauging 130/30 strategies:

1. The leveraged long and short positions are merely active bets, no different than the active bets taken by long only managers. While the effects of leverage may seem profound, they are no different than effects of big factor bets such as style, industry or size. 2. Leverage and shorting notwithstanding, the goal of 130/30 managers is to deliver a portfolio beta of close to 1. This beta is the market beta, which is represented by an appropriate market benchmark. 3. 130/30 managers seek to outperform market benchmarks in a risk controlled fashion. This is supported by Standard & Poor's research which shows that all institutional 130/30 managers have adopted market benchmarks as their performance yardstick.

Standard & Poor's paper also addresses the emergence of 130/30 indices. "Not all indices are benchmarks. New 130/30 indices, such as those launched by Standard & Poor's, are investment strategies rolled into an index calculation," adds Dash. "These indices are excellent tools to facilitate creation of transparent, exchange listed investment products, but are inappropriate benchmarks for active managers."

About Standard & Poor's Index Services

Standard & Poor's Index Services, the world's leading index provider, maintains a wide variety of investable and benchmark indices to meet an array of investor needs. Its family of indices includes the S&P 500, an index with $1.32 trillion invested and $4.91 trillion benchmarked, and the S&P Global 1200, a composite index comprised of seven regional and country headline indices. For more information, please visit http://www.standardandpoors.com/indices.

About Standard & Poor's

Standard & Poor's, a division of The McGraw-Hill Companies , is the world's foremost provider of financial market intelligence, including independent credit ratings, indices, risk evaluation, investment research and data. With approximately 8,500 employees, including wholly owned affiliates, located in 23 countries, Standard & Poor's is an essential part of the world's financial infrastructure and has played a leading role for more than 140 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions. For more information, visit: http://www.standardandpoors.com/.

(1) * Jeffrey Bailey, "Evaluating Benchmark Quality," Financial Analysts

Journal, May/June 1992.