VIEWPOINT: Benchmarking Investment Performance

The seventh video in our Proteus Viewpoint video series, Benchmarking: Are Your Investments Performing Well?

Watch the video and read the below Q&A.

When it comes to investing, what is a common mistake people make?

Often, the benchmark used to evaluate the performance of the funds is not appropriate. For fiduciaries, benchmarks play an important role in helping to determine if investments are doing what they are supposed to do. If you are using the wrong benchmark, you may be making decisions based on incorrect information.

What is the importance of a benchmark?

Benchmarks are part of the monitoring process, which in turn is part of the plan governance process. The purpose of monitoring investment performance is to compare how the fund has done from both a return and a risk perspective.

What are some common benchmarks?

  • TSX Composite for Canadian equities (this is the broad Canadian market)
  • S&P 500 for the broad US stock market
  • MSCI World for the global developed countries stock markets
  • What methods are used to determine an appropriate benchmark?

    Determining an appropriate benchmark comes down to making sure you understand how the fund is structured and what the investment process is. For example, you should be looking at where the fund invests and what type of holdings they have.

    What is an example of when using a benchmark is inappropriate?

    Pension committees and boards need to be aware of how the managers use benchmark performance in sales pitches. All managers compare their performance (both return and risk) to a benchmark, however, the committee or board will need to know enough about the fund to ensure the benchmark being shown by the manager makes sense.

    What should the result be?

    The result should be that you select a benchmark that captures the fund’s exposure to different sources of risk and use a universe of securities that are as close as possible to the universe that the manager uses to pick their stocks from. The reality is that, often, the ideal benchmark is not readily available, so you would have to construct a fully customized benchmark.

    Bottom line: don’t simply accept the manager’s default benchmark as being appropriate for your plan. You are the fiduciary and how you evaluate the ongoing appropriateness of the plan’s investments matters and you want to make sure you are basing your decisions on the right information.

    Talk to an objective third-party about ensuring your plan’s benchmark is appropriate.