Guide & Papers

Benchmarking Portfolios

Benchmarks are integral to investment management in many ways. In some respects, they drive portfolio management. There are obvious contexts, where passive funds track market benchmarks to gain exposure to asset classes, and less obvious ways.

Why do we Benchmark?

The CFA Institute describes performance benchmarking as not able to be conducted in a vacuum:

“…By its nature, performance evaluation is a relative concept. Even so called “absolute return” managers should provide some sense of how alternative uses of their clients’ money would have performed if exposed to similar risks”.

This idea of what else could the client have done with their money and how does it compare is important. If considering a potential product, we want to know that it can demonstrate strong repeatable performance that is superior to other opportunities available, taking costs and other factors into account. We also need to consider what the client needs. As investment managers, clients pay us to invest their savings and we charge a fee for that. Benchmarking shows clients what they are getting for their money. As well as forming a key part of the due diligence analysis needed in order to select and retain a manager.

Benchmarking to Goals

First and foremost, clients pay us to invest for the future, to grow their wealth to reach longerterm goals. This is the foundation of the overall financial plan, underpinning clients’ lifestyles and peace of mind. When forming any plan, we make assumptions about how the future will play out, to provide focus and targets for individuals to save and invest towards. Inflation is “enemy number one” for every investor, and we can use it as a structured benchmark to make sure that clients’ growth is on track to attain their goals. If they haven’t outpaced inflation, regardless of absolute return, the portfolio has lost “real value”.


Inflation based benchmarks are therefore a useful tool for monitoring client portfolios and many analytics tools provide “CPI+%” or “RPI+%” indices that returns can be measured against. Retirement planning tools, such as Timeline Planning and others, that model returns against inflation, serve a strong purpose in helping clients conceptualise the investment path, which research shows brings discipline to the savings process. A study by Hershfield et al. (2011) showed participants that interacted with realistic computer renderings of their future selves using immersive virtual reality and interactive decision aids, exhibited an increased tendency to accept later monetary rewards over immediate ones. Planning tools increase the salience of future savings and needs, illustrating where the client is and where they need to be in the future.

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