THE MEDIAN MANAGER IS NOT SPECIFIED IN ADVANCE, BECAUSE COMPILERS O...

6. The median manager is not specified in advance, because compilers of manager peer groups

can identify the median fund only ex post. Before an evaluation period, there is no

knowledge of the future median fund. Due to the nature of producing the statistics associated

with the median fund, the composition of the median fund will change from one

measurement period to the next.

B. The S&P 500 Index is based on only 500 relatively large firms from various industries, most of

which are listed on the New York Stock Exchange (NYSE). Together, these 500 firms comprise

approximately 80 percent of the total value of the stocks listed on the NYSE.

Although the S&P 500 Index is generally regarded as an acceptable comparative index for

institutional portfolios, a number of technical problems reduce its usefulness as a universal

benchmark. Among these problems are:

• a large capitalization bias;

• double counting that results from (corporate) cross ownership of equities in the index;

• failure to cover 100 percent of the value of all traded U.S. securities, because it includes

only common stocks, most of which are listed on the NYSE, and excludes many AMEX

stocks and many over-the-counter (OTC) stocks.

• inclusion of some international (non-US based) companies.

Because Sloan & Co. is the only U.S. equity manager hired by ECB Inc. and operates under the

broad mandate of investing in any U.S. equity securities, an index representing a broad universe

of U.S. equities would be the appropriate benchmark for comparative purposes. To properly

reflect that broad investment mandate, ECB Inc. should work with Sloan to segment the

portfolio so that Sloan’s assets may be more appropriately measured against indices such as the

NASDAQ, AMEX, Russell 2000, and potentially other indices. A custom benchmark that

includes all U.S. equities (e.g., a benchmark that consists of a weighted sum of existing indices)

would be far more appropriate than either a median manager or a single index approach.

Level III: Question 20

Topic: Real Estate

Minutes: 6

Readings: