In essence, benchmarks are a standard against which the performance of financial instruments like managed funds can be measured. More often than not, broad market and market-segment indices are used for benchmarking purposes. A benchmark is usually an index of securities from the same, or similar, class: stocks are usually compared against stocks, bonds against bonds and so on.
Why benchmarks can be a useful tool for investors
When an investors is looking at the performance of an investment, it helps to be able to compare it to something else to give a sense of how well or how badly the performance of the investment compares. Market indices can be useful for managed fund investors by offering market ‘standards’ to help them evaluate the risk and the return history of their own investments.
In the Australian financial landscape, there are many indices that analysts and fund managers use to gauge performance. In the interest rate securities area these include the Bloomberg (formerly UBS) Bank Bill Index and the Bloomberg Composite Bond Index. International bond funds will naturally use a different set of benchmarks to domestic funds.
When an investor is deciding on which managed fund they might want to use, the product literature describing the fund will make reference to a benchmark with the intention of giving the investor a sense of how well the fund has performed over time. It is mandatory for the sponsors of managed funds to declare a benchmark index, which must be independent and based on the objectives of the fund.
If the fund delivers higher returns than the benchmark, then it is said to have outperformed the index or benchmark. If the fund delivers lower returns than the benchmark, then it is said to have underperformed the benchmark. If the fund is actively managed and delivers a returns equal to the benchmark, then it is also said to have underperformed.
Establishing whether a fund has outperformed its benchmark is important in selecting a managed fund and this can be determined by looking at the fund’s historical returns over 1 year, 3 years, 5 years and sometimes 10 year returns, if the data is available. A fund that can consistently outperform its benchmark is likely to be more popular than one that cannot. YieldReport carries regular data on a range of managed funds that allows investors to look at various funds and find out how they have performed over time.
Naturally, performance against an index or benchmark is not the only yardstick for deciding which fund to invest in and past performance is not a guarantee of future performance. Investors should also consider their own risk profile and a host of other factors when deciding where to invest.
 |
Paul McNamara is an editor and journalist with over 20 years’ experience. His career includes spells with the Financial Times, Euromoney, BRW Media, Asia-Inc and Banker Middle East. At present he is editor of YieldReport. YieldReport is a digital newsletter that carries comprehensive pricing and commentary on Australian interest rate securities in a monthly and weekly report. Each issue covers bank bills, cash accounts, term deposits, government bonds, semi-government and corporate bonds, hybrids, ETFs, managed funds and more. Click here for a free trial subscription. |
|
