Custom Stable Value Benchmark Translation
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Solution Overview
Problem
Existing performance benchmarks for stable value funds, such as the Ryan GIC Indices and MFR Money Market Index, fail to accurately measure the investible universe of asset strategies and book value returns of stable value managers, as they do not account for client-specific factors and the complex calculations involved in crediting rates and market value to book value ratios.
Innovation Solution
The Dwight Custom Stable Value Benchmark calculates a customized performance benchmark by translating market benchmark returns into book value returns and market value to book value ratios, incorporating client-specific factors and crediting rates, and accounts for yields, durations, and returns of market value benchmarks, allowing for a more accurate comparison of stable value fund performance.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Measurement precision
If standard market value indexes (Ryan GIC Indices, MFR Money Market Index) are used as benchmarks, then the benchmarking process is simple and straightforward, but the measurement accuracy of stable value fund performance deteriorates because these indexes do not account for book value returns and client-specific factors
Solution Approach 1:
The patent introduces a custom benchmark index as an intermediary that translates market value index returns into book value returns using crediting rate formulas. This mediator bridges the gap between simple market value indexes and the complex book value performance measurement, allowing accurate comparison without directly using complex client-specific calculations.
Solution Approach 2:
The patent creates a customized benchmark that copies the structure and calculation methodology of actual stable value fund crediting rates. By replicating the benefit-responsive crediting rate formulae in the benchmark, the system enables apples-to-apples comparison between fund performance and benchmark performance while maintaining measurement accuracy.
2Reliability
If a one-size-fits-all market value based index is used to benchmark stable value funds, then the benchmarking process is easy to implement, but the reliability of performance comparison deteriorates due to client-driven factors such as cash flow history impacting fund performance
Solution Approach 1:
The patent applies local quality by customizing the benchmark to match the specific characteristics of each stable value fund, including its crediting rate formula, asset allocation, and client cash flow patterns. Instead of a uniform benchmark for all funds, each fund receives a tailored benchmark that reflects its unique qualities, thereby improving comparison reliability.
Solution Approach 2:
The patent performs preliminary action by pre-calculating the custom benchmark index using the fund's specific crediting rate formula and historical data before the actual performance comparison. This advance preparation incorporates client-specific factors into the benchmark structure, ensuring reliable comparisons without requiring complex real-time calculations during performance assessment.
3Adaptability or versatility
If traditional market value indexes are used as benchmarks, then the benchmark data is easily obtainable and simple to calculate, but the benchmark fails to capture the investible universe of asset strategies and book value returns employed by stable value managers
Solution Approach 1:
The patent segments the benchmark construction process into distinct components: selecting appropriate market value indexes for each asset class, applying crediting rate formulas specific to different fund structures, and aggregating results to create the custom benchmark. This segmentation allows the benchmark to adapt to various asset strategies while maintaining a systematic and manageable structure.
Data Source
AI summary
Embodiments calculate a customized performance benchmark for a stable value fund by incorporating client-specific factors and calculating an overall crediting rate, as if the assets underlying the wrap contracts and insurance separate account contracts were invested in the market indices to which the fund's portfolio strategies are benchmarked, rather than being invested in the actual underlying portfolios of the fund. The resulting benchmark translates market benchmark returns into book value returns and resulting market value to book value ratios, to compare to the actual stable value fund performance. The crediting rate process accounts for the yields, durations, and returns of the market value benchmarks in addition to client-specific cash flows and market value to book value ratios.