Investment benchmarks: what they are and why they’re used
How benchmarks are built and why they’re in your investment reports
2 min read
We aim to be highly transparent when reporting our investment performance to clients and, where possible, compare our returns to those of our competitors. But we also provide a comparison to ‘benchmark’ performance, which can be less well understood. Here’s a quick guide to change that.
What is a benchmark?
A benchmark is a theoretical, ‘no frills’ portfolio we put together to set a minimum standard that we try to beat in the long term. We don’t invest in it, we just track the numbers to help you see how we’re performing in terms of our active asset allocation, risk management and returns.
It’s how you might invest if you had no view on the future direction of markets, the world’s economies or specific assets. The day-to-day, nimble navigation of events you get from an active investment manager is stripped away. Markets and the wider world will inevitably change over any particular period, and the benchmark shows how your investments would have performed if you’d done nothing in response.
How do benchmarks work at Coutts?
We track seven different benchmarks reflecting different weights between bonds and equities. This provides a benchmark that’s relevant to the various risk levels our clients want to take and the return they want to make.
We publish performance data for the benchmark alongside our own portfolio or fund performance whenever we report progress.
Our aim over the long term is for our portfolios and funds to perform better than their benchmarks. That’s never guaranteed, but it’s always our goal. We also, of course, endeavour to perform consistently better than our competitors.
What’s included in the benchmark portfolios?
Our benchmarks are made up of government bonds, credit (other types of bonds) and shares – which cover 95% of what’s available to investors. We feel that is a decent representation of the full ‘investment universe’. They don’t include other things we might decide to actually invest in, such as cash, real estate or commodities, as the benchmarks are supposed to represent a relatively straightforward, standard view of investment markets.
We refer to our benchmarks as the Long-term Tactical Asset Allocation (LTAA).
Do we have to use them?
Yes. Regulations require funds and portfolios to be measured against a relevant benchmark. They are an important tool to help us manage your investments and help you assess how we’re doing.
Why would my fund ever perform differently to the benchmark?
There are a few important things you should remember when comparing portfolio or fund performance against a benchmark.
- Active management in the real world is about day-to-day changes, while the benchmark is fixed. The idea is that, over time, we will at least meet, but ideally beat, the benchmark, but active management decisions could mean we underperform in the short term. We try and anticipate which assets will do well and invest before the change in fortune occurs.
- We report returns net of the costs involved in managing investments. The benchmark is purely the gross performance of the relevant assets and so has an in-built advantage.
- We invest in a wider range of assets than the benchmark as we work to diversify risk and enhance returns. So if the assets we own that don’t feature in the benchmark do particularly well or badly during a certain period, it can affect our relative performance over that time.
These factors are part of the reason why comparing our performance to our competitors is so useful – it provides context in the here and now. If markets experience a big shock that we manage better than others, it’s perfectly possible for our performance to compare well against peers despite doing less well against the benchmark.
How much attention should I pay to benchmarks?
Benchmarks are a useful way to see how your investments are doing. They provide a ‘what if’ comparison that can be extremely helpful.
But they are one part of the bigger picture and should be taken alongside other factors such as how we compare to our competitors.
Our advice to clients is that the longer-term performance of their portfolio should always be measured first and foremost against their own financial objectives.
How often does Coutts change its benchmarks?
We review them once a year and in practice change them less often than that. They’re designed to reflect longer-term investment trends, so we feel this is the right frequency.
How do I find out MORE?
Our private bankers are always on hand and happy to talk through this or any aspect of investing. You can call them directly, or Coutts 24 on 020 7957 2424.
When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.