11 Jun 2014

Benchmarking

In order to quantify the success or otherwise of a fund manager, a metric in the form of a benchmark is usually stipulated. Examples of equity benchmarks would be broadly based equity indices. In fixed income, the construction of a benchmark portfolio is more complex, as individual securities need to be selected.

The characteristics of the chosen benchmark should be:
  •  Specified in advance to the fund manager
  • Unambiguous and appropriate to the type of fund being run. For example, the Dow Jones index in the US is far less representative of the US larger capitalisation stocks compared with the S&P 500 index
  •  Liquid and easily measurable
  •  Reflective of current investment opinions

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