Why WMR FX Benchmarks matter for global index returns and performance measurement

WMR FX Benchmarks are widely used across global equity, fixed income, and multi asset indices and play an important role in calculating index returns. Using the FTSE World Government Bond Index (WGBI) as a case study, this paper shows how differences in FX observation time and FX data source can affect benchmark returns, tracking results and measured manager performance, even when the underlying investments remain unchanged.

Key takeaways: 

• The analysis shows that FX returns have historically represented a significant component of FTSE WGBI USD unhedged returns.
• Relative to the WMR Closing Spot Rates (London 4pm), a one-hour difference in FX observation time can produce a FTSE WGBI USD unhedged return basis of up to approximately 18–26 bps, equivalent to USD 1.8–2.6 million on a USD 1 billion allocation. With larger timing differences, the basis can reach approximately 30–45 bps, or USD 3–4.5 million per USD 1 billion.
• FX source also matters. Using a different FX source at the same observation time can produce a FTSE WGBI USD unhedged return basis of up to around 5 bps, equivalent to approximately USD 0.5 million on a USD 1 billion allocation.

Points of differentiation: 

• The analysis reconstructs counterfactual FTSE WGBI USD unhedged returns while keeping the underlying bonds and country weights fixed, isolating the effect of the FX convention itself.
• It separately measures the impact of FX timing, FX source and their combined effect, using hourly WMR Intraday Spot Rates and Composite RIC observations relative to the WMR Closing Spot Rates convention.
• The research links these return differences to portfolio scale and observed manager performance, translating the basis into dollar-equivalent amounts and testing whether it can change the sign of measured benchmark-relative performance.

What does our research mean for investors? 

For asset owners: Using a different FX source or observation time from the WMR Closing Spot Rates can move measured performance relative to the FTSE WGBI USD unhedged even when the underlying investments are unchanged. For managers with underlying over- or underperformance of around ±10 bps, this can materially affect the observed result, with an approximately 20% historical probability of reversing the sign of active performance.

For asset managers: Differences between the FX convention used by a portfolio and that embedded in the FTSE WGBI USD unhedged can affect observed tracking difference and active return, meaning part of measured benchmark-relative performance can reflect FX timing or source rather than changes in the underlying investments.