Benchmarks Explained

Benchmarks Explained

What Is a Benchmark?

A benchmark is a standard used to measure the performance of an investment portfolio. Benchmarks typically consist of market indices representing specific asset classes, such as equities or bonds.

Comparing portfolio performance to an appropriate benchmark helps provide context for returns.

Examples of commonly used indices include:

• S&P/TSX Composite Index – Canadian equities
• S&P 500 Index – U.S. equities
• FTSE Canada Universe Bond Index – Canadian fixed income

A market index tracks a specific financial segment (like Canadian equities), whereas a benchmark is a reference point chosen to evaluate a specific portfolio’s management. While benchmarks often use market indices, an index is only an appropriate benchmark if it aligns with the portfolio’s strategy.

Blended Benchmarks

Most diversified portfolios invest across multiple asset classes. As a result, performance is often measured against a blended benchmark, which combines multiple indices in proportions that reflect the portfolio’s strategic asset allocation.

The weighting of each component in the blended benchmark is typically aligned with the portfolio’s long-term asset mix.

Purpose of Benchmarks

Benchmarks are used to:

• Provide context for investment returns
• Evaluate portfolio performance relative to market conditions
• Support transparency and accountability between investors and the portfolio manager

Without a benchmark, it can be difficult to determine whether portfolio performance reflects market movements or investment decisions. Performance comparisons are only meaningful if the benchmark is a match for the portfolio. If a benchmark does not reflect the portfolio’s investment approach, asset mix, geographic exposure, and risk profile, the comparison may either overstate or understate how the portfolio has performed relative to its investment universe. For this reason, benchmarks should be selected carefully and intended to remain stable over time, changing only when there is a material and sustained shift in how the portfolio is managed.

Characteristics Of an Appropriate Benchmark

A meaningful benchmark should be:

• Relevant to the portfolio’s investment strategy, asset mix, and risk profile
• Transparent and clearly defined
• Investable, representing a portfolio that could reasonably be replicated
• Measurable, with publicly available performance data
• Consistent over time, so performance comparisons are meaningful across different periods
• Established in advance and not changed frequently

Comparing Your Portfolio to a Benchmark

Benchmarks are a useful tool for evaluating investment performance, but there are important differences between benchmarks and actual portfolios. For example:

• Benchmarks do not include management fees, transaction costs, or taxes
• Benchmarks represent hypothetical returns based on the performance of underlying investable indices
• Actively managed portfolios may deviate from benchmarks in pursuit of long-term investment objectives

As a result, short-term differences between portfolio returns and benchmark returns are common.

Nexus Pooled Fund Benchmarks

The benchmarks shown below were selected to reflect each fund’s long-term investment objective, strategic asset mix, risk profile, and the geographic exposure of the securities held in the portfolio.

Nexus North American Equity Fund:

Investment Objective: To provide superior long-term investment returns through the capital appreciation of equity securities.

Nexus North American Balanced Fund:

Investment Objective: To provide superior long-term investment returns through a balanced portfolio of equity and debt securities.

Nexus North American Income Fund:

Investment Objective: To preserve capital and provide consistent distributable income principally through investment in North American fixed income securities.

Nexus International Equity Fund:

Investment Objective: To provide superior long-term investment returns through the capital appreciation of equity securities of non-North American issuers.