News this past week
- Failed coup impacts Turkey’s financial markets
- European Central Bank maintains monetary policy position
- Weak PMI data from the UK following Brexit
- IMF downgrades global and UK growth forecasts
- Japanese stimulus expectations continue following trade data
James Klempster, CFA of Momentum Global Investment Management shares his view:
Benchmarks are references against which a process is measured. In everyday life it could be the means to assess the efficacy of a process or the degree of sporting success, but in investments a benchmark is usually a return which an investor aims to beat. There are a wide and varied range of benchmarks that investors aspire to outperform. Traditionally an investment benchmark is a reference index such as a relevant equity or bond market. This has a number of advantages such as being widely known, investable, measurable and representative of an asset class or a composite of asset classes. They should provide a yardstick for an investor both in terms of returns and also risk. If a benchmark is relatively low risk, for example, it seems fair to assume that a fund managed against that benchmark would also be relatively low risk. This is not always the case, however, and investors that dramatically outperform their benchmarks in relatively short order should call into question the appropriateness of their benchmark. A slow, progressive, cumulative outperformance of a benchmark over a long period of time seems more reasonable. They are undoubtedly a useful tool for assessing manager performance but the problem with benchmarks is that they do not speak to investor needs. A benchmark really just reflects how a market or composite of markets performed over a relevant period of time and this could be a great, terrible or indifferent outcome for a particular investor.