We use cookies to support features like login and allow trusted media partners to analyse aggregated site usage.
To dismiss this message and allow cookies to be used, please click "Continue".



Twitter board

Follow us
  • My week on Twitter 🎉: 1 Retweet, 2.63K Retweet Reach, 3 New Followers. See yours with https://t.co/mCw3VcMQGw https://t.co/78tC0GzGXxyesterday
  • Our cover story: CDC: A step into the unknown. Is CDC an unnecessary policy change when effort would be better spen… https://t.co/QGHfTkiPP24 days ago
  • Newton – Trend Setting: The Year Ahead in ESG ''We have seen notable client interest for sustainable products over… https://t.co/OoXVLJ1BMp4 days ago
  • Our Latest ESG feature: EM governance: Breaking through. ''Those calling for better governance in emerging markets… https://t.co/qk0vJpfpJL7 days ago
  • The February Issue is available online now! Our Cover Story - CDC: A Step in the wrong direction. Read more here:… https://t.co/8xwHL9Nd2z7 days ago
  • RT @AonRetirementUK: What do we expect to see in the #ESG market over the next 12 months? Read the results of the @portfolio_inst panel of…7 days ago
  • RT @PensionsSion: What are the pros and cons of building a global #equity portfolio? Find out by reading the @portfolio_inst Global Equitie…13 days ago
  • RT @AonRetirementUK: Outcomes delivered by employer pension schemes now depend more than ever on levels of engagement. Companies must creat…14 days ago
  • Our latest Roundtable: Cash-Flow Driven Investing is now live! Read more here: https://t.co/zBy7Gbiud9 https://t.co/KJTIgVssmG14 days ago
  • RT @BNPPAM_COM: 2017 was one of the most active hurricane seasons on record, causing up to USD 475 billion worth of damage. What are the in…26 days ago
  • RT @PensionsTony: At the Aon London #pensions conference. About to start my workshop on how well #DC schemes are meeting the needs of #memb…26 days ago
  • Andrew Wauchope talks to Mark Dunne about charities and their pension schemes, the secret of being a good trustee a… https://t.co/xcdcxs61QL26 days ago
  • Enter the Dragon : China’s inclusion in the @MSCI_Inc Emerging Market index has caused little excitement, but, as L… https://t.co/oy0EdSI6A828 days ago
  • The @InvescoUKinsti whitepaper: Responsible investing and active ownership. Invesco’s Bonnie Saynay and Henning St… https://t.co/E3Gdh9eDSM33 days ago
  • Charlotte Moore looks at the reaction of financial markets to Brexit has already changed the shape of the relations… https://t.co/6KH9jnWTtq33 days ago
  • RT @AonRetirementUK: Want to know more about the benefits of factor-based investing for your DB pension scheme? Aon’s next Investment Break…34 days ago
  • Learn more about why everyone is talking ESG on our new ESG HUB, where we will be publishing our latest features pl… https://t.co/Dg9FiwCPCn35 days ago
  • 2018: The year of the human?. Cyber crime, greater disclosure, fixed income, people and, of course, climate change.… https://t.co/HMkzWcrFNy35 days ago
  • ''Building a global portfolio of equities could also provide much needed diversification'', discover why in our Glo… https://t.co/y90GhLlmCD35 days ago
  • What is your stance on executive pay? is bigger really better? Read more in our new ESG feature:… https://t.co/cUXMiCDuE560 days ago


An unhappy comparison?

An unhappy comparison?

Tuesday 18th November 2014

Humans have an irresistible urge to compare their performance against their peers. As English dramatist and poet laureate, Thomas Shadwell, famously said: “No man is happy but by comparison.” Shadwell died in 1692, nearly 100 years before the birth of stock exchanges in 1773.

And still the urge lives on. In investment terms, comparison often means looking at the gap between how an investment has performed and a commonly accepted measure of that particular universe, or benchmark.

And, with passive investment on the rise since the financial crisis, the dominance of broad market benchmarks in investors’ psyche is on the increase. Today, the S&P 500 has become one of the most commonly used benchmarks by which to compare equity market performance. It is widely considered to be one of the best representations of the US stock market, and a bellwether for the US economy. In 2013, S&P Dow Jones Indices estimated more than $7trn of assets globally were explicitly benchmarked to the S&P 500 through index- tracking mutual funds, institutional funds, separately managed accounts, indexed insurance products and ETFs.

This doesn’t include the unofficial benchmarking many investors do by comparing the performance of a range of assets against this widely held barometer or investment performance. It is not uncommon, for example, to see comparisons of hedge funds’ performance reported against the S&P 500 even though those hedge funds are generally not designed to produce performance in line with this benchmark.


At the holistic portfolio level, investors are increasingly adopting an outcome-oriented approach to investment, particularly as many pension funds, for example, close or move to liability-matching strategies. As such, more and more are taking a more self-centric approach to performance, focusing instead on bespoke benchmarks that capture their individual liability stream.

As Andrew Kirton, EuroPac investments head at Mercer, says: “Almost universally in today’s market, institutional investors will have their own unique investment strategy. For defined benefit pension plans, in addition, the investment strategy will evolve dynamically given the objective for many is to de-risk the portfolio over time.

“The advent of scheme-specific investment strategies is not a new development, but arguably dates from the turn of the current century when mark-to-market valuation techniques were introduced by the actuaries in response to changing accounting standards. At the total portfolio level benchmarks are often expressed as a ‘journey’, over a specified time period to a desired level of solvency and set of risk parameters.”

However, outcome-oriented or self-centric measurement of performance often disappears at the asset level, where broad market benchmarks are still commonly used as reference points. As Aon Hewitt senior partner John Belgrove puts it: “To know if a manager is doing a good job, you need a benchmark that is representative of their opportunity set to judge them against. Undeniably cap-weighted benchmarks are the dominant form of investment measurement in the market. They are a fair and full representation of the opportunity set of a market and still the purest form of beta.”

In this context, benchmarks and indices serve a number of purposes to investors. As well as being representative of the performance across a given universe of securities (i.e. the money-weighted current opinion of value), they do not require rebalancing or transaction costs to maintain.

“They are one of the very best capital market innovations of the last 40 years,” according to Bob Maynard, chief investment officer of the $15bn Public Employee Retirement System of Idaho (PERSI). “Kudos to Bill Fouse and Wells Fargo for making it happen. They are also the cheapest alternative to an active management or other investment approach, and thus are a measure of a basic value-add.”

Page: 1 2 3

Leave your comment

View our comments policy

Please login or register with us to leave a comment. It's completely free!