"Understanding Fixed-Income Benchmark Risk"
Report by Deborah Kidd of the CFA Institute
"The fixed-income investing landscape has changed dramatically in the decades since index providers first began offering fixed-income indices during the 1970s. As fixed-income products have become more complex and sophisticated, index providers have responded in kind with a proliferation of subindices, custom indices, and new weighting schemes. Because an index may define the universe of securities in which a manager may invest, the choice of an index as a benchmark can directly affect portfolio risk exposures and relative performance measurement. For these reasons, investors should thoroughly understand an index before selecting it as a benchmark. Once an index is chosen, a well-thought-out investment policy must be put in place to avoid risk exposures and performance divergence from the benchmark that are unanticipated."