Although active management implies flexibility in response to changing prospects for the financial markets, this flexibility is constrained by limits managers impose on themselves. A manager avoids certain practices that are inconsistent with his decision process, the institutional culture of his firm or the broad expectations of his client. As a result, the manager tends to operate within a universe of investment assets that is more or less unique to him. This universe will differ from the universes of other managers and from broad market indexes and will tend to persist through a wide variety of market conditions and over extended periods of time.

Through careful analysis, it is possible to identify the universe in which each manager operates and to represent this universe in terms of an index designed to replicate the neutral position of the manager’s portfolio. Use of such an index offers two important benefits. First, it allows the plan sponsor better control over total fund diversification. The plan sponsor, not the individual manager, is accountable for the allocation of assets between various universes so as to achieve the diversification goals of the total fund. Second, it provides the plan sponsor with a more appropriate gauge of each manager’s performance. The manager is judged in terms of the universe in which he operates and held accountable only for the performance attributable to the strategies he believes he can implement most successfully.