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Benchmarking - what's the best measure of success?

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EssDeeAitch
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Benchmarking - what's the best measure of success?

#198897

Postby EssDeeAitch » February 4th, 2019, 6:11 pm

Since starting self-investing I have read many comments by financial commentators such as "it has performed in line with its benchmark", "its outperformed it's benchmark" and so on. The trouble for me is that the benchmark can be very subjective and that trust/fund managers seem to use clever strategies to make the investments "fit" to a particular benchmark.

Then even when the benchmark has been negative for the period in question, performance that is in line with that benchmark seems to be lauded as a good thing, "well, we lost you money, but we beat the benchmark by 3%". So what? Professional fund managers are paid handsomely to beat the index otherwise we may as well all revert to trackers I suppose.

I believe that investors would be better off creating their own benchmark; at looking at an acceptable minimum return which may be the inflation rate, or inflation plus 2/5/10%, or whatever is most appropriate for that investors circumstances. To this end, I have created for myself a simple calculator which compares a funds returns over a time period mapped against the inflation rates.

I feel better now.

EDIT

Blow me down, this has just come in from Citywire
Justify your benchmarks, watchdog tells fund groups - "The regulator said: 'We have found that fund managers rarely explain why or how they are using particular benchmarks. Some of the ways fund managers use benchmarks include as a constraint on how they construct a fund’s portfolio, as a target for fund’s performance, or as a way for investors to compare the fund’s performance."

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Re: Benchmarking - what's the best measure of success?

#198931

Postby Lootman » February 4th, 2019, 8:44 pm

EssDeeAitch wrote:Then even when the benchmark has been negative for the period in question, performance that is in line with that benchmark seems to be lauded as a good thing, "well, we lost you money, but we beat the benchmark by 3%". So what? Professional fund managers are paid handsomely to beat the index otherwise we may as well all revert to trackers I suppose.

I think part of the problem is that the word "benchmark" is ambiguous. To my mind it has at least three separate meanings:

1) For an index fund it is quite simply the index it is seeking to follow. In such a case the deviation from that underlying index is called the tracking error, and it's really a measure of how faithful and efficient the tracking methodology is. In this case it would be very suspect if the fund beat its benchmark by a large amount (say your 3% in a year). You might think that's a good thing but I would take the view that the tracking methodology has failed.

2) For an active fund then the chosen benchmark is usually an index that reasonably reflects the universe of shares from which the fund will choose. Here clearly the idea is to beat that index. If it doesn't then, as you say, there's no point in choosing it over a passive fund that tracks that same index, because the latter will definitely be cheaper and have more predictable results.

3) Then there is a personal benchmark, which is a statement about what you personally are seeking from a fund or portfolio. And that varies enormously. So to take your example, if it would dismay you to beat the index by 3% if you actually lost money, then your benchmark is some kind of real return number. It's not really the fault of a fund that invests in Japan if it is down 5% and the Japanese market is down 8%. That's still a good result even though you lost money.

If you really abhor the idea of a loss in any one year then your benchmark is a real or absolute return, and you'd be looking for funds that claim they will never lose money YOY. There are funds that make such a claim, but even if they succeed it is likely that you will greatly under-perform in good years because they will eschew risk and play it safe via low-risk safe investments and hedging away risks. A 100% safe fund would invest 100% in short-dated gilts.

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Re: Benchmarking - what's the best measure of success?

#198939

Postby EssDeeAitch » February 4th, 2019, 9:47 pm

Lootman wrote:
EssDeeAitch wrote:Then even when the benchmark has been negative for the period in question, performance that is in line with that benchmark seems to be lauded as a good thing, "well, we lost you money, but we beat the benchmark by 3%". So what? Professional fund managers are paid handsomely to beat the index otherwise we may as well all revert to trackers I suppose.


I think part of the problem is that the word "benchmark" is ambiguous. To my mind it has at least three separate meanings:

.........................................................

If you really abhor the idea of a loss in any one year then your benchmark is a real or absolute return, and you'd be looking for funds that claim they will never lose money YOY. There are funds that make such a claim, but even if they succeed it is likely that you will greatly under-perform in good years because they will eschew risk and play it safe via low-risk safe investments and hedging away risks. A 100% safe fund would invest 100% in short-dated gilts.


Your points are quite valid, I have no argument on them at all. I think that at my stage in life, with my particular circumstances, I would certainly embrace low volatility in return for inflation + something. Naturally, no fund provider can guarantee any type of result so its up to me to try to work out which ones give me what I am looking for; but I do feel that benchmarks can be misleading as well as providing guidance.

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Re: Benchmarking - what's the best measure of success?

#198958

Postby Alaric » February 5th, 2019, 12:07 am

Lootman wrote:I think part of the problem is that the word "benchmark" is ambiguous.


For the private investor, the simplest possible benchmark is the "do nothing" one. If you have money to invest, it's only because you have an excess of income over expenditure, or, in the case of pension contributions you aren't given the money to spend in the first place. So has investing increased your wealth more than leaving the funds in a bank account? Usually the answer is yes, particularly with the derisory interest rates over the past ten years or more, but not necessarily so.

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Re: Benchmarking - what's the best measure of success?

#199022

Postby OhNoNotimAgain » February 5th, 2019, 10:47 am

EssDeeAitch wrote:
Lootman wrote:
EssDeeAitch wrote:Then even when the benchmark has been negative for the period in question, performance that is in line with that benchmark seems to be lauded as a good thing, "well, we lost you money, but we beat the benchmark by 3%". So what? Professional fund managers are paid handsomely to beat the index otherwise we may as well all revert to trackers I suppose.


I think part of the problem is that the word "benchmark" is ambiguous. To my mind it has at least three separate meanings:

.........................................................

If you really abhor the idea of a loss in any one year then your benchmark is a real or absolute return, and you'd be looking for funds that claim they will never lose money YOY. There are funds that make such a claim, but even if they succeed it is likely that you will greatly under-perform in good years because they will eschew risk and play it safe via low-risk safe investments and hedging away risks. A 100% safe fund would invest 100% in short-dated gilts.


Your points are quite valid, I have no argument on them at all. I think that at my stage in life, with my particular circumstances, I would certainly embrace low volatility in return for inflation + something. Naturally, no fund provider can guarantee any type of result so its up to me to try to work out which ones give me what I am looking for; but I do feel that benchmarks can be misleading as well as providing guidance.


Volatility is the mental anguish you have to accept to enjoy the fruits of better long-term growth in equities. It does not follow however that you should find the most volatile assets to get the best long term-growth.

For PI's it is better to find a fund to use as a benchmark than an index because it shows net returns and not the gross returns of an index that has no costs. So find an index you like and then the best fund that tracks it.

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Re: Benchmarking - what's the best measure of success?

#199142

Postby Hariseldon58 » February 5th, 2019, 7:52 pm

OhNotHimAgain said
Volatility is the mental anguish you have to accept to enjoy the fruits of better long-term growth in equities. It does not follow however that you should find the most volatile assets to get the best long term-growth.

For PI's it is better to find a fund to use as a benchmark than an index because it shows net returns and not the gross returns of an index that has no costs. So find an index you like and then the best fund that tracks it.


Both are good points, overall I like the Vanguard Life Strategy Funds as a simple comparison, pick your chosen risk level , my choice is the 80% equities.

Another choice is one of the private investor blended indices https://www.pimfa.co.uk/private-investor-indices/

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Re: Benchmarking - what's the best measure of success?

#199180

Postby Avantegarde » February 5th, 2019, 10:23 pm

Benchmarks can be very useful, as I found out when I reviewed the progress of my five-year-old portfolio of investment trusts. I found that the total return of a few ITs in the portfolio had simply failed to beat a relevant comparative index in that time, such as the FTSE All Share (for UK focused funds) or the FTSE World index (for global funds). The point here was two-fold: I could have obtained a similar or even better return by investing in a cheaper index fund; secondly, even if a trust itself does not use such an index as a benchmark, you certainly can, and should. There are plenty of tracker funds that track these indices and even if you do not invest your money in one, you can certainly use their returns as a comparator for your own investments.

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Re: Benchmarking - what's the best measure of success?

#199207

Postby EssDeeAitch » February 6th, 2019, 6:45 am

Avantegarde wrote:................. you can certainly use their returns as a comparator for your own investments.


I think that's my point, it may well be better to use a comparitor of ones own choice or even design (inflation + x for example) without simply accepting the index against which the fund is measured.

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Re: Benchmarking - what's the best measure of success?

#199224

Postby OhNoNotimAgain » February 6th, 2019, 8:44 am

EssDeeAitch wrote:
Avantegarde wrote:................. you can certainly use their returns as a comparator for your own investments.


I think that's my point, it may well be better to use a comparitor of ones own choice or even design (inflation + x for example) without simply accepting the index against which the fund is measured.


HL has 2237 indices on its site and that does not include any from this company
http://thefreedomindex.com/and probably quite a few others so there is no real need to design your own.

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Re: Benchmarking - what's the best measure of success?

#199232

Postby EssDeeAitch » February 6th, 2019, 9:13 am

OhNoNotimAgain wrote:
EssDeeAitch wrote:
Avantegarde wrote:................. you can certainly use their returns as a comparator for your own investments.


I think that's my point, it may well be better to use a comparitor of ones own choice or even design (inflation + x for example) without simply accepting the index against which the fund is measured.


HL has 2237 indices on its site and that does not include any from this company
http://thefreedomindex.com/and probably quite a few others so there is no real need to design your own.


Yes, you are probably correct but I am not aware of one that calculates (for example) CPI plus 3% (or whatever the above inflation rate you want) for 1,3,5,10 years. But my main point is that (as in my original post), not the lack of indexes but the misuse of indexes and the justification of a fund having performed just because it has beaten an index even though the fund has lost money.

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Re: Benchmarking - what's the best measure of success?

#199299

Postby OhNoNotimAgain » February 6th, 2019, 1:16 pm

EssDeeAitch wrote:
OhNoNotimAgain wrote:
EssDeeAitch wrote:
I think that's my point, it may well be better to use a comparitor of ones own choice or even design (inflation + x for example) without simply accepting the index against which the fund is measured.


HL has 2237 indices on its site and that does not include any from this company
http://thefreedomindex.com/and probably quite a few others so there is no real need to design your own.


Yes, you are probably correct but I am not aware of one that calculates (for example) CPI plus 3% (or whatever the above inflation rate you want) for 1,3,5,10 years. But my main point is that (as in my original post), not the lack of indexes but the misuse of indexes and the justification of a fund having performed just because it has beaten an index even though the fund has lost money.


Have you looked at what HL has got, for example:


CPI Excluding Owners Equivalent Rent + 3%

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Re: Benchmarking - what's the best measure of success?

#199323

Postby EssDeeAitch » February 6th, 2019, 2:48 pm

OhNoNotimAgain wrote:
EssDeeAitch wrote:
OhNoNotimAgain wrote:
HL has 2237 indices on its site and that does not include any from this company
http://thefreedomindex.com/and probably quite a few others so there is no real need to design your own.


Yes, you are probably correct but I am not aware of one that calculates (for example) CPI plus 3% (or whatever the above inflation rate you want) for 1,3,5,10 years. But my main point is that (as in my original post), not the lack of indexes but the misuse of indexes and the justification of a fund having performed just because it has beaten an index even though the fund has lost money.


Have you looked at what HL has got, for example:


CPI Excluding Owners Equivalent Rent + 3%


That sounds good, I have searched for this under "Indecies Other" without success - can you point me to it?

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Re: Benchmarking - what's the best measure of success?

#199334

Postby OhNoNotimAgain » February 6th, 2019, 3:38 pm

EssDeeAitch wrote:
OhNoNotimAgain wrote:
EssDeeAitch wrote:
Yes, you are probably correct but I am not aware of one that calculates (for example) CPI plus 3% (or whatever the above inflation rate you want) for 1,3,5,10 years. But my main point is that (as in my original post), not the lack of indexes but the misuse of indexes and the justification of a fund having performed just because it has beaten an index even though the fund has lost money.


Have you looked at what HL has got, for example:


CPI Excluding Owners Equivalent Rent + 3%


That sounds good, I have searched for this under "Indecies Other" without success - can you point me to it?


Find a fund, any fund, select charts and performance tab then bottom right in Add to chart, tick Index and then go to select an index and scroll through 2,237 of them to find the one you want.

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Re: Benchmarking - what's the best measure of success?

#199344

Postby EssDeeAitch » February 6th, 2019, 3:52 pm

OhNoNotimAgain wrote:
EssDeeAitch wrote:
OhNoNotimAgain wrote:
Have you looked at what HL has got, for example:


CPI Excluding Owners Equivalent Rent + 3%


That sounds good, I have searched for this under "Indecies Other" without success - can you point me to it?


Find a fund, any fund, select charts and performance tab then bottom right in Add to chart, tick Index and then go to select an index and scroll through 2,237 of them to find the one you want.


Got it, that's lovely thanks. Whilst its great for funds, I was looking at shares (for IT's specifically) which has different layout and options - so the "CPI Excluding Owners Equivalent Rent + 3%" etc are not available on them. Pity.

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Re: Benchmarking - what's the best measure of success?

#200082

Postby BasketCase » February 9th, 2019, 9:49 am

Hi,

In case it's helpful and/or to gain feedback, my approach has been to simply allocate one of four benchmark alternatives (UK, Global, Emerging Market and UK Fixed Income) to every share, ETF or Investment Trust I have. I then compare the performance of the selected share against the benchmark (assuming it was purchased on the same date). This makes it very easy to see whether I would have done better to simply buy the relevant tracker (either in capital value or income terms). My benchmarks are the ETFs from iShares (ISF, IWRD, IEEM and IGLS), although ironically I invest in HSBC and Vanguard trackers instead of these as their costs are lower!

What my approach does not do is consider timing (as it assumes I make a purchase of a benchmark ETF when I choose to buy something else), but that seemed too much work in excel (ultimately do any of us know if we get the timing of purchases right save years in retrospect).

I also compare performance against an expected yield and capital value growth determined at the outset (with higher growth in capital expected from small cap stocks and lower for HYP shares etc). This allows me to compare individual shares and baskets to an expected value. The concept being that if I am behind expected value, it may be a good time to invest more (to get back on to the glide path) and if I am above it, to be mindful of that (return to mean and all that).

I am not yet comparing against an fixed benchmark (e.g. UK RPI), but if I did so, I would only do this for dividend growth as I accept nobody (least of all me) will be able to guarantee they beat an absolute return requirement as investing in equity means I accept that there will be some volatility of returns (including losses in some years). As I am growing my portfolio (i.e. investing monthly) such down periods are (hopefully!) a long-term opportunity to deliver value more than expected return!

Anyway, hope that's of interest to someone. Don't post much! Cheers BasketCase.

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Re: Benchmarking - what's the best measure of success?

#200084

Postby 77ss » February 9th, 2019, 10:16 am

EssDeeAitch wrote:
OhNoNotimAgain wrote:
EssDeeAitch wrote:
That sounds good, I have searched for this under "Indecies Other" without success - can you point me to it?


Find a fund, any fund, select charts and performance tab then bottom right in Add to chart, tick Index and then go to select an index and scroll through 2,237 of them to find the one you want.


Got it, that's lovely thanks. Whilst its great for funds, I was looking at shares (for IT's specifically) which has different layout and options - so the "CPI Excluding Owners Equivalent Rent + 3%" etc are not available on them. Pity.


It is available, but you have to get at it in a roundabout fashion - a very useful tip that I got from another poster - I forget whom.

Go into the HL fund charting (I just use Fundsmith), then add an equity (eg the IT you are interested in) to the chart. The full range of indices is available to add to the chart.

Personally, these days (I am fully built), I tend to use an internal benchmark (my largest holding) - FCIT - as a rough guideline when deciding on where to put any unspent income. Over 5 years, its TR is slightly better than "CPI Excluding Owners Equivalent Rent + 8%" - assuming HL to be correct.

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Re: Benchmarking - what's the best measure of success?

#200242

Postby EssDeeAitch » February 10th, 2019, 8:40 am

77ss wrote:
EssDeeAitch wrote:
OhNoNotimAgain wrote:
Find a fund, any fund, select charts and performance tab then bottom right in Add to chart, tick Index and then go to select an index and scroll through 2,237 of them to find the one you want.


Got it, that's lovely thanks. Whilst its great for funds, I was looking at shares (for IT's specifically) which has different layout and options - so the "CPI Excluding Owners Equivalent Rent + 3%" etc are not available on them. Pity.


It is available, but you have to get at it in a roundabout fashion - a very useful tip that I got from another poster - I forget whom.

Go into the HL fund charting (I just use Fundsmith), then add an equity (eg the IT you are interested in) to the chart. The full range of indices is available to add to the chart.

Personally, these days (I am fully built), I tend to use an internal benchmark (my largest holding) - FCIT - as a rough guideline when deciding on where to put any unspent income. Over 5 years, its TR is slightly better than "CPI Excluding Owners Equivalent Rent + 8%" - assuming HL to be correct.


My, my - that's a good workaround and thanks for it. I really would have thought that HL would have made charting tools the same for both types of investment but there you go.

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Re: Benchmarking - what's the best measure of success?

#200296

Postby EssDeeAitch » February 10th, 2019, 11:56 am

BasketCase wrote:................................................
......................
I am not yet comparing against an fixed benchmark (e.g. UK RPI), but if I did so, I would only do this for dividend growth as I accept nobody (least of all me) will be able to guarantee they beat an absolute return requirement as investing in equity means I accept that there will be some volatility of returns (including losses in some years). As I am growing my portfolio (i.e. investing monthly) such down periods are (hopefully!) a long-term opportunity to deliver value more than expected return!

Anyway, hope that's of interest to someone. Don't post much! Cheers BasketCase.


Yes, it is interesting and thanks for the response to my post. I am not entirely sure where I am going with this but right now, I am favouring RPI +x% as a "smell test" on past performance.

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Re: Benchmarking - what's the best measure of success?

#200309

Postby 0x3F » February 10th, 2019, 1:36 pm

EssDeeAitch wrote:
BasketCase wrote:Yes, it is interesting and thanks for the response to my post. I am not entirely sure where I am going with this but right now, I am favouring RPI +x% as a "smell test" on past performance.


I use two measures, one of which is RPI+3% - My theory being 3% to live off of while maintaining pot size in real terms. I get the data from the government website.

The other measure is FTSE All share total return which I aim to outperform and with lower volatility. This index has been around for a long time (and so hopefully will be in future) and is easy to get data for.

- 0x3F

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Re: Benchmarking - what's the best measure of success?

#200316

Postby tjh290633 » February 10th, 2019, 2:11 pm

I use two benchmarks, the FTSE100 for income unit price comparison and the RPI for comparison of dividend per income unit.

As my principal interest is income, the latter is the factor of real interest. Capital changes are secondary. That is not to say unimportant.

If you are looking at total return, then you need the TR version of your favourite index.

TJH


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