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What are SWIB’s Financial Benchmarks?

Financial benchmarks are important to the State of Wisconsin Investment Board. Benchmarks are the standard against which both returns and risks of a security, fund or investment manager can be measured. But how are benchmarks set, who reviews them and how often do they change? And what is SWIB’s goal when measuring performance against the benchmarks?

Comparing investment returns to a benchmark is a way to measure an investor’s performance. It answers the question, What value was added by the manager’s decisions?

SWIB’s Board of Trustees, with the help of an independent consultant, set the financial benchmarks used by SWIB to measure the performance of the Core and Variable Trust Funds, each asset class and individual portfolios. SWIB’s benchmarks are reviewed each year to ensure they are still the best measurement. Changes to the benchmark are applied to the next year. The most commonly used benchmarks are market indexes such as the Dow Jones Industrial Average, the S&P 500, or the Russell 2000. However, there are dozens of other market indexes that focus on specific industry sectors, security classes and other market segments. Because benchmarks and portfolios include similar investments, the performance for both will change with the market. As the year progresses, SWIB compares our year-to-date performance with the performance of the benchmark year-to-date.

Unfortunately, using an index that does not accurately reflect the types of investments is like comparing apples to oranges. The Core Fund includes a mixture of asset types, including domestic and international stocks, real estate and bonds. Because of its diversity, the Core Fund benchmark is mainly a composite of several market indexes, including the Russell 3000, a measure of the U.S. stock market as a whole, along with international indexes, bond indexes and measures for other asset classes. The all-stock Variable Fund includes the Russell 3000 and Morgan Stanley World Index ex-U.S., plus emerging markets, which reflects the mix of U.S. and international stocks.

SWIB’s goal is to exceed benchmarks adopted by trustees over the long term. Exceeding benchmarks has helped SWIB add an additional $1.2 billion to the trust funds. Exceeding the benchmark means portfolio managers’ decisions made more money for the funds than investing in a passive market index. A common mistake is to take a short-term view when judging the performance of investments against the benchmark. Benchmarks should be difficult enough to beat so that the staff is rewarded for performance that compares favorably to the markets. The benchmarks should not be so difficult they encourage excessive risk taking.

Generally, a majority of SWIB’s portfolios beat their benchmarks each year, although particular portfolios that beat their benchmarks tend to vary from year to year. This is an indication that benchmarks are appropriate.