Benchmarks Explained

Topic: CRM2

James E. Houston, CIM, FCSI

January 12, 2017

Image used with permission: iStock/BrianAJackson


Print & Share

Print

Benchmarks Explained

A benchmark is defined as “a point of reference from which measurements may be made”, or “something that serves as a standard by which others may be measured or judged”.1 Benchmarking is a common practice of measuring many things, from student evaluations to business processes. In the case of investment management, it is generally used to measure or grade investment performance.

At Nexus, for instance, when we report the performance of our pooled funds, we also compare it to the performance of the funds’ respective benchmarks. Each of our four funds has its own benchmark which is relevant to the mandate of the specific fund.

Benchmarks are usually made up of a blend of common broad market indices. As an example, the objective of our Nexus North American Balanced Fund is “to provide superior long-term investment returns through a balanced portfolio of equity and debt securities”. As such, and because it is a North American fund, the benchmark that we compare our fund’s performance to has components representing cash, bonds and Canadian and U.S. equities. Specifically, the blended benchmark of our Balanced Fund is (and always has been):

Cash – 5% FTSE TMX Canada 91-Day T-Bill Index
Bonds – 30% FTSE TMX Canada Universe Bond Index
Canadian Equities – 40% S&P/TSX Composite Index (Total Return)
U.S. Equities – 25% S&P 500 Index (Total Return) (in CAD$)

When constructing a benchmark for a fund there are certain essential characteristics that it must have:2

  • Unambiguous. The identities and weights of securities are clearly defined.
  • Investable. It is possible to simply hold the benchmark.
  • Measurable. The benchmark’s return is readily calculable on a reasonably frequent basis.
  • Appropriate. The benchmark is consistent with the manager’s investment style or area of expertise.
  • Reflective of current investment opinions. The manager has current investment knowledge of the securities in the benchmark.
  • Specified in advance. The benchmark is specified prior to the start of an evaluation period and known to all interested parties.
  • Owned. The investment manager should be aware of and accept accountability for the constituents and performance of the benchmark.

Presenting our funds’ performance against a benchmark allows our clients to see how we have performed in a particular market environment over similar periods of time, and provides us with evidence to determine whether our funds are meeting their objectives.

These days, Exchange Traded Funds (“ETFs”) allow do-it-yourself investors to readily build portfolios that replicate benchmarks. But determining an appropriate mix that is personalized for the investor’s financial circumstances and risk tolerance is difficult. Apart from ongoing monitoring and re-balancing, managing the behavioural bias to buy high and sell low that is common to all investors, is tremendously challenging.

At Nexus we have learned that successful long-term investing comes from having a financial plan that establishes a strategic asset mix designed to your personal investment objectives. When integrated with an investment manager who keeps you from doing the wrong thing at the wrong time, and whose “active” investment style and stock selection protects capital in down markets, your chances of long-term wealth creation greatly improve.

We have written in the past about ETFs and “passive” investing. Our blog ETFs and Risk – What Clients Are Asking Us from 2013, is still relevant today and can be found here.

1 Benchmark www.merriam-webster.com
2 Managing Investment Portfolios: A Dynamic Process (CFA Institute), Third edition, John L. Maginn, CFA, Donald L. Tuttle, CFA, Jerald E. Pinto, CFA, Dennis W. McLeavey, CFA.

More Like This...

See another CRM2 blog post that may be of interest to you.

CRM2: The Nexus Approach to our CRM2 Reports

Topic:
CRM2
Excerpt:
With changing securities regulations coming into effect, investment firms are now required to provide individual investors with specific additional in

More Like This...

See another Foundations & Endowments blog post that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

More Like This...

See another Human Interest blog post that may be of interest to you.

The Case for Openness – An Open and Shut Case?

Topic:
Human Interest
Excerpt:
From time immemorial, mankind has been open. Open to new ideas, open to trade, and open to migration – the three critical ingredients for progress.

More Like This...

See another Inside Nexus blog post that may be of interest to you.

Here we Grow Again!

Topic:
Inside Nexus
Excerpt:
Recently, the Nexus team welcomed our seventh new face to join us since the start of the pandemic in 2020. As growth is an integral part of our

More Like This...

See another Investments blog post that may be of interest to you.

Lessons From the Art World and Beyond

Topic:
Investments
Excerpt:
“Exactitude is not truth.”

More Like This...

See another Pearls of Wisdom blog post that may be of interest to you.

“Work, Work, Work, Work, Work, Work”

Topic:
Pearls of Wisdom
Excerpt:
This has been a busy year. I’ve had lots happening on the home front (a wedding!) and lots going on at the office (too long to list!) Managing work

More Like This...

See another Tax Planning blog post that may be of interest to you.

Saving in my Professional Corporation – It’s a Great Idea!

Topic:
Tax Planning
Excerpt:
The ability for professionals in Canada to incorporate their practice has existed for some time. Doctors, dentists, lawyers, accountants, and other

More Like This...

See another Wealth Planning blog post that may be of interest to you.

Living to 100

Topic:
Wealth Planning, Living to 100
Excerpt:
“You’re going to live to 100!” For some, this may sound like a fantastic, welcome prognosis. They imagine gazing at sunsets every evening at the

On a Side Note…

See another CRM2 Nexus Notes Quarterly article that may be of interest to you.

No posts found.

On a Side Note…

See another Foundations & Endowments Nexus Notes Quarterly article that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

On a Side Note…

See another Human Interest Nexus Notes Quarterly article that may be of interest to you.

The Case for Openness – An Open and Shut Case?

Topic:
Human Interest
Excerpt:
From time immemorial, mankind has been open. Open to new ideas, open to trade, and open to migration – the three critical ingredients for progress.

On a Side Note…

See another Inside Nexus Nexus Notes Quarterly article that may be of interest to you.

Here we Grow Again!

Topic:
Inside Nexus
Excerpt:
Recently, the Nexus team welcomed our seventh new face to join us since the start of the pandemic in 2020. As growth is an integral part of our

On a Side Note…

See another Investments Nexus Notes Quarterly article that may be of interest to you.

The End of an Era – Inflation is Back!

Topic:
Investments
Excerpt:
Inflation talk is dominating the news. It is on the mind of the man in the street and investors alike – and not just in North America or the lands of

On a Side Note…

See another Pearls of Wisdom Nexus Notes Quarterly article that may be of interest to you.

A Table for None, Please; Working From Home on the Rise

Topic:
Pearls of Wisdom
Excerpt:
Reading is one of the principal occupations in our profession. As we digest a wide range of material, interesting ideas and surprising facts – some

On a Side Note…

See another Tax Planning Nexus Notes Quarterly article that may be of interest to you.

Saving in my Professional Corporation – It’s a Great Idea!

Topic:
Tax Planning
Excerpt:
The ability for professionals in Canada to incorporate their practice has existed for some time. Doctors, dentists, lawyers, accountants, and other

On a Side Note…

See another Wealth Planning Nexus Notes Quarterly article that may be of interest to you.

From The Editor: What’s My Age Again?

Topic:
Wealth Planning, Living to 100
Excerpt:
How old are you? It’s a simple question, one we readily know the answer to, although some of us might not want to talk about it. And why do we know