What are the ARC Charity Indices ("ACI")?

ARC Charity Index	Relative Risk to UK Equities
ARC Sterling Cautious ACI	0 – 40%
ARC Sterling Balanced Asset ACI	40 – 60%
ARC Sterling Steady Growth ACI	60 – 80%
ARC Sterling Equity Risk ACI	80 – 110%

ARC Charity Indices are a set of Sterling denominated risk-based indices designed to be used by charity trustees and their advisers in assessing the performance of any discretionary charity portfolio with a non-specialist mandate. The ACI cover the four following risk categories:

Risk, for these purposes, is measured as the volatility of monthly returns over time. It is recognised that charity portfolios are exposed to other types of risk – i.e. failure to meet income targets or failure to grow in real terms, but it is exposure to potential loss of capital that is used as the common classification system for the ACI.

The ACI provide a unique insight into the actual returns being generated by investment managers for their discretionary charity portfolios. The indices are based on the real performance numbers for 5,000+ Sterling denominated charity portfolios submitted by participating investment managers (Data Contributors).

There are no pre-set asset allocations; no asset class restrictions; no concentration limits; and no index performances used. Only actual performance numbers are included in the calculation of the indices.

The ACI are designed to provide an accurate reflection of the actual returns that a charity portfolio should expect from a discretionary portfolio manager for a given risk appetite. By comparing performance with the relevant ACI index, the investment manager is free to use any and all investment strategies, vehicles and structures in the pursuit of the maximum return per unit of realised volatility.

The indices are available free of charge to anyone through a web-based service which can be found at www.suggestus.com. Participating investment managers can use the ACI performance series in charity portfolio reporting and marketing activities.

ACI Calculation Methodology

At the end of every month, using a defined control group of indices and funds, the ACI series are estimated for the previous month. These estimates are made available to both participating investment managers and subscribers a few working days after the end of each month. Actual performance data (net of fees) is then gathered from the participating investment managers over the month following quarter end. For each Data Contributor, a performance average in each of the four ACI risk categories is calculated as data becomes available. The deadline for all data submissions by Data Contributors is the three weeks after the quarter end. ARC may exercise its discretion in allowing data submitted after the deadline to be included within the index calculation.

The geometric average of all the Data Contributor portfolios within each ACI category is then calculated with weightings applied to reduce the influence of larger managers and published as a performance series with a base of 100 as at the end of December 2003.

The aim is to finalise the ACI monthly performance numbers around four weeks after each relevant quarter end. Data Contributors and subscribers are informed when the finalised ACI performance data is available. No recalculations as a result of changes to historical data will be published, ensuring that historical ACI data remains unchanged. In the event of a discovery of a material error in the indices, ARC will notify stakeholders and correct the impacted index.

Data Integrity

All Data Contributors have undertaken to ensure that data supplied by them for ACI accurately reflects the investment performance of their discretionary charity portfolio team.

However, ARC recognises that data integrity is critical to the acceptance of the ACI indices as suitable performance yardsticks. Thus, the data verification task is taken extremely seriously. Each quarter, data contributors are asked to sign off on their data submissions and a series of validation checks are made.

ARC reserves the right to exclude any data that it has reason to believe does not meet the required standard.

Monthly performance data net of fees is collected from participating investment managers on a quarterly basis. Managers are asked to provide actual performance numbers for all their unconstrained discretionary charity portfolios.

Only actual performance data goes into the ACI, no model or synthetic figures are accepted for inclusion. ARC applies a hierarchy of data inputs into the ACI index calculation:

• Individual Portfolios ARC requires all Data Contributors who offer individual client portfolios to provide monthly performance of individual portfolios, net of fees.

Additionally, ARC may at its discretion include composite data where it is satisfied that the Data Contributor is unable to provide individual portfolio data and that the quality of the indices is enhanced by its inclusion:

• Audited Composite Those investment managers who have audited composite data (such as those applying the GIPS reporting standard) may supply the audited performance data for each of their performance categories.
• Fund Performance Data Investment managers that offer a unitised version of their charity investment solutions may choose to supply performance data for these funds as a proxy for that being delivered by their discretionary charity business as a whole.

Other data that may be provided for comparison in the ACI reports, but not for inclusion in the indices, is as follows:

• Manager Composite Managers Managers who calculate internal composites that are unaudited may supply such data for reporting purposes.
• Verified Model Performance of model portfolios is not accepted for inclusion in the ACI calculation, but may be submitted for reporting purposes provided that ARC can verify that the performance numbers being submitted are representative of the performance of typical charity portfolios.

Data Sufficiency

ARC carefully monitors to breadth and depth of data submissions to ensure that the ACI remain representative of the range of outcomes available to charity clients for a given risk category.

Where the number of data contributors in a particular index is judged to be insufficient to be considered representative, ARC may at its discretion identify and include performance data for third party composites (Composite Contributors). Only actual performance (net of fees) of funds or audited composites will be included. ARC will list any Composite Contributors in the quarterly ARC Performance Report.

Data Validation

For those participating investment managers providing actual portfolio performance information (the preferred type of submission) the following guidelines are used:

• Discretionary mandates only
• No minimum portfolio value
• Performance numbers are to be given net of all fees and charges
• Monthly performance numbers should be provided wherever possible
• Heavily constrained portfolios may be excluded
• Data Contributors should provide at least 20 portfolios per ACI risk category

Consistency of portfolio submission by each Data Contributor is carefully monitored by ARC to minimise the potential impact of survivorship bias.

ACI Category Allocation

Each contributed data series is assigned to a ACI risk category by ARC according to its estimated historical relative risk to the equity risk measure. Where the historical relative risk profile is border-line between two ACI categories or where a data series has less than a three year track record, ARC may ask the Data Contributor for guidance as to which risk category would be most appropriate.

It is recognised that active asset allocation can cause the relative risk of a data series to change over time. In order to bring an element of stability to each of the ACI peer groups, once a data series has been allocated a ACI category, a 10 percentage point deviation in relative risk is tolerated.

Thus, the tolerance bands are as follows:

ARC Charity Index	Relative Risk to Equities
	Lower limit	Standard Band	Upper limit
ARC Cautious ACI	0%	0 - 40%	50%
ARC Balanced Asset ACI	30%	40 - 60%	70%
ARC Steady Growth ACI	50%	60 – 80%	90%
ARC Equity Risk ACI	70%	80 – 110%	120%

By way of example, the Sharpe chart below shows a (potential) distribution of contributed data within the Sterling Balanced Asset ACI category over a three year time frame. A line has been drawn around the outermost points, then the next set of points in and so on until all points have been incorporated on a colour contour. By shading the contours, the median risk-return profile can be identified as the darkest red shading. However, note that a few of the outlying data points are outside the defined risk band.

The blue lines show the official risk banding for the Balanced Asset ACI (0.4 to 0.6 relative risk).

The grey lines show the upper and lower relative risk thresholds for contributed data.

The portfolios in the red region would not automatically move into the Cautious ACI category (0.0 to 0.4 relative risk).

They would remain in the Balanced Asset ACI category until they breached the grey line or if they remain in this region for twelve months they will be re-categorised in the thirteenth month. This approach ensures tactical asset allocation decisions are not treated as strategic changes.

By implementing this process of ACI category management, it is possible to differentiate between tactical (i.e. temporary) risk profile changes and strategic (i.e. permanent) alterations in investment objective.

ACI Governance

The ACI methodology and index calculations are subject to regular review by the senior management of ARC. The review includes the extent to which ARC has applied its discretion to any particular calculation and whether such judgements are applied consistently.

The indices are subject to annual review by the ARC Chief Operating Officer to assess whether the indices have been appropriately administered.

ARC will consult with stakeholders in the event of material changes to the ACI methodology, and on the planned creation or termination of any individual index.

For more information

Please get in touch with the Charity Team by emailing charities@suggestus.com

You can sign up to receive the monthly estimates, thought pieces and quarterly ACI reports at www.suggestus.com.