What are the ARC Charity Indices?
They are a set of four Sterling denominated peer group indices compiled by ARC Research Limited (ARC). They are specifically designed to be used by charity trustees and advisers in assessing the performance of your charity’s investment portfolio performance. The Indices provide an insight into the actual returns being generated by investment managers for their discretionary managed charity portfolios.
Are the investment manager’s fees included in the numbers?
Yes. We only collect the data based on the actual returns that the charity receives. The result is you can see the average investment experience in a given risk profile.
Why does ARC classify each charity portfolio - why can’t the manager decide?
A core component of the methodology used in compiling the ARC Charity Indices is to categorise all portfolios on a common basis according to their historic return volatility. The methodology is designed to be style agnostic, with the focus on outcomes rather than inputs.
If portfolios were classified by managers it would not be possible to compare like-with-like.
Why classify each charity portfolio according to volatility instead of asset allocation?
The difference between using asset allocation and return volatility can be described as the difference between using an ex ante and ex post classification system. Asset allocation helps to describe the expected portfolio return characteristics. The monthly return path delivered is a record of the return volatility actually experienced by a portfolio.
The indices are designed to record actual outcomes rather than predicted outcomes.
How are the ARC Charity Indices different to the ARC Private Client Indices (PCI)?
The construction methodology is similar and some of the portfolios included in the calculation of the ARC Sterling PCI series will also be included in the calculation of the ARC Charity Indices. However, it is recognised that charities are a distinct sector and that, whilst some firms combine their private client and charity divisions, others choose to run separate operations.
To ensure that the ARC Charity Indices are entirely relevant to the charity community, it was deemed appropriate to publish separate indices. Only charity portfolios are included in the calculation of the ARC Charity Indices.
The two sets of Indices exhibit very similar return profiles during normal market conditions. However, the events of 2008 revealed that the greater focus on income generation and ethical constraints by charities result in a material divergence in return profile versus private client portfolios with similar volatility profiles.
Do you use Common Investment Funds in the Indices calculation?
CIF data will not be used directly in the calculation of the Indices. However, the circa 20 non-specialist CIFs will be used to assist in producing monthly performance estimates and may be used as control points in peer group analysis.
Does ARC make money out of the Indices?
The Indices will available free of charge to charity trustees and their advisers. Investment managers will not be charged to submit data but may incur a charge to receive analysis of their portfolios in a peer group context. We also may charge charities who wish to access our analysis and expertise in performance assessment.
What is the publishing schedule?
Please see the table below:
| Event | Date Released |
|---|---|
| Daily Estimates | Every day based on the previous working day |
| Monthly Estimates | Within 3 working days of the month end |
| Quarterly Estimates | Within 4 working days of the quarter end |
| Generic ACI Results | Within 4 working days of the month following the quarter end |
| Individual Data Contributor Reports | Within 4 weeks of the Initial Data Deadline |
| Additional documentation (chart packs, outlier charts, supplementary analysis, etc) | Within 1 week of release of Individual Data Contributor Reports |
| Data Contributor Meetings | Meetings will commence within 4 weeks of the Initial Data Deadline |
Don’t the data contributors just send you their best portfolios?
This is a common question and it requires a detailed response. Below are three main headers:
Legal
All managers have signed up in the legal agreement to use their best endeavours to ensure that data supplied accurately reflects the investment performance of their typical discretionary charity clients. They have also undertaken not to manipulate their submission with the intention of either over- or under-stating their performance averages. Given that all the contributors are reputable and regulated, it would be potentially damaging for anyone to wilfully breach this legal undertaking.
Data Quality Control
We have three analysts working on the data loading and report production. Our programming and database team has grown this year to six people and the technology is on a continuous development programme. All manager data is checked each quarter for portfolios “disappearing” and any anomalous results are checked with the manager. We reserve the right in the PCI agreement to exclude data from the calculation of the ACI and will do so if we have not received sufficient information regarding a particular data submission. We also ask each quarter for the contributors to confirm that figures are net of fees, over the required minimum and to give us an idea of percentage of AUM that is being provided.
When a new manager joins ACI, we check their data against third party sources, such as portfolios that we monitor funds, models, published composites etc. and quite often we overlay model data in their scatter plots, so it would be apparent if the data had been manipulated. Where a manager is unable to give us all their data we have ensured that we are confident as to the nature of each firm’s submission and undertake checks to confirm that the data set is truly reflective of their performance.
Outputs
We do not publish a league table of managers and there would be very little benefit to a manager in misrepresenting their own figures. Existing clients will be disappointed if they are underperforming the overstated figures, the ACI’s overall become harder to beat and the marketing benefits would be short lived and possibly in contravention of regulatory guidance on marketing performance figures.
Is the data net of fees?
Yes, the figures reflect the returns actually received.
How do you calculate relative risk?
Relative risk is calculated by establishing the annualised three year standard deviation of excess returns over cash (1 month deposit) for each portfolio and dividing that by the same figure for UK equities and that figure may be stated as a percentage (e.g. relative risk of 0.5 is 50% of equity risk). Thus, each portfolio may be placed into our risk buckets according to its relative risk to equities.
Why do you use excess returns?
Excess returns are the returns of a portfolio above (or below) the reference base currency cash rate. This effectively strips out the “risk-free” return from doing nothing i.e. just holding cash and allows for comparison of the final indices across currencies.
Why isn’t my investment manager in the contributor list?
They should be as it is free to contribute their data! Drop us a line and we’ll see what we can do at info@suggestus.com.
My portfolio is not doing as well as the index, what should I do?
Short term deviation in performance is not unusual and most portfolios will out or under-perform their benchmark during different periods. However, long term cumulative underperformance or a significantly large short term underperformance would warrant a comment from the investment manager. Agree a course of action with the manager and a timeframe for the correction (e.g. 6 months) and re-visit the performance at the end of the “watch” period.
Can you tell me who the best manager is?
Manager selection is as much art as science and our experience has shown that although performance is an important factor, qualitative considerations such as service quality, reporting capability and risk management are also key ingredients in finding the best manager for your circumstances. It is important to understand why a manager’s performance looks as it does and to establish whether this performance is likely to persist.
What is the difference between the estimated and published numbers?
The published ARC ACI Series is based on the real world charity client performance, calculated from over 5,000+ portfolios from over 30 investment managers. The estimates are calculated using statistical methods to come up with a “best guess” of performance but are not based on actual client performance.
How do you calculate the estimates?
The estimates are calculated using statistical methods that attempt to derive a model portfolio whose historical returns most closely match the actual ACI results. The estimates are then based on the predicted return of the model portfolio. The model is updated quarterly on publication of the ARC ACI Series.
What are the underlying constituents?
The underlying constituents are a set of up to 16 Exchange Traded Funds (‘ETFs’) that have been selected to represent the broad range of asset classes represented a typical private client portfolio. As the models are not intended to be used as the basis for an actual client portfolio, ARC will not publish the individual constituents.
Where do you get the asset allocation from?
ARC does not collect asset allocations from managers and so the estimates are not based on real world asset allocations. The estimation methods used derive the exposure of a particular index to the market risk and return factors of the underlying constituents.
Can you give me the asset allocation history?
No, the historical calculated asset allocation is only available to the ACI contributors. You can see the current inferred asset allocation on the ACI page.
Can you give me the historical estimates?
No. As the estimates are our “best guess”, they are replaced by the actual published figures as soon as these become available.
How accurate are your estimates?
The estimates are intended to provide users with useful information on the expected average performance of Discretionary Managers rather than make a precise prediction. Accuracy is limited by a number of factors including underlying volatility of the constituents and of course the individual investment decisions taken by Discretionary Managers. We aim to continually improve the accuracy of our estimates.
Got a question?
Get in touch info@suggestus.com