We understand investment returns are uncertain and short-term returns vary widely. So how can we evaluate short-term performance?
Investment benchmarking is the best choice to track how well your portfolio is doing.
Birdie or Bogey?
Australian adviser David Haintz, founding director of Shadforth Financial Group and consultancy firm Global Adviser Alpha, often uses a golf analogy when discussing portfolio returns.
“What sort of professional golfer couldn’t tell you whether they are getting birdies, pars or bogeys?””
He raises an important point; most investors, when asked how their portfolio is doing, respond with "pretty well" based on a number at the bottom of a sheet. But is it a birdie, par or bogey?
David Haintz goes on to say:
"Portfolio benchmarking can answer the following questions: How has your portfolio performed?"
"What returns have you achieved? How concentrated is your portfolio? How much risk have you taken? Is this an efficient way of investing? Is there a better way?"
A Tale of Two Managers
Imagine we are comparing two fund managers. Maybe you have already invested with them or maybe you are considering doing so. How do we identify the superior manager? Surely the one with the higher returns? Do we need more information?
Consider the two managers below. Manager 2 has outperformed their peer by 5% over the past year.
Let's add one important piece of information. Manager 1 invests only in Australian shares while Manager 2 invests in NZ shares. A market benchmark for Australia is the ASX 300 Index (i.e. a good approximate for the whole share market). For NZ we can use the NZX 50 Portfolio Index.
Now we can compare each manager's performance to the market they participate in. Manager 1 has outperformed by more than 3% while Manager 2 has underperformed by about 2.5%. In other words, within their respective markets, Manager 1 added value while Manager 2 detracted value.
Taking into account the markets which each manager targeted adds context. If we are looking only at the past year, Manager 1 is clearly superior; they scored a birdie, Manager 2 scored a bogey.
We produce quarterly benchmark reports which compare all of our approved funds to their benchmark indices. In doing so, we hope to add context and nuance to our understanding of investment returns.