Another important consideration is determining the most appropriate benchmark, or measure of success, for an EM allocation. Investors could consider the following:
• Measuring performance against a relevant benchmark for that specific asset class can provide a bottom-up perspective. This benchmark-aware evaluation can indicate whether a manager’s security selection and active allocation made a positive or negative impact.
• Measuring performance against a composite benchmark helps provide a top-down look at the allocation’s success. Because EM asset classes experience varying degrees of volatility, we believe it is important to compare returns across different time horizons and for investors to keep in mind their own investment objectives.
• Measuring against pre-defined return and risk targets may be appropriate for absolute return strategies or to check whether the portfolio meets the desired outcomes. However, this method would not capture the wider market context which is important to gain a proper understanding of how a portfolio performed. For example, an allocation to EM hard-currency debt may fall short of absolute return targets for a set time period, but still outperform the wider market over the period. Therefore, this allocation could contribute to helping a portfolio achieve its long-term return goals by mitigating the losses during
a specific period.