#19 What is the most relevant benchmark when investing in the stockmarket
In an industry which is very focused on performance, an investor who has read any fund manager reports will often see references to the ‘benchmark’ and how a certain Fund has performed versus its relevant benchmark.
What is a benchmark?
Benchmarks are used in the investment industry as a point of reference to monitor how various portfolios are performing relative to their target over a set period of time.
The most commonly used benchmark in Australia to monitor the relative performance of Australian share portfolios is the ASX 300 index, which measures how the top 300 stocks perform. Other benchmarks which are used to monitor smaller companies’ portfolios are things such as the Small Ordinaries Index which measures how stocks outside the top 100 in Australia are performing.
These indices are market weighted indices i.e. the larger a company is, the higher its weighting in the index. Index managers (also known as passive managers) seek to exactly replicate the index’s performance by buying stocks precisely according to their weight in the index that they are looking to replicate. Active managers, such as Investors Mutual, seek to outperform the index over the long term by selecting a portfolio of quality and value stocks after undertaking fairly exhaustive research that, in our view, will provide better risk adjusted returns than the index over a market cycle.
While some investors and advisers have a preference for using passive managers, in our opinion many are unaware of the issues arising when a portfolio is constructed to strictly track an index as one’s benchmark in the sharemarket.