Benchmark

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In finance, a benchmark is "a standard against which the performance of a security, mutual fund or investment manager can be measured". [1] For single asset classes, such as stocks and bonds, the relevant benchmark is typically a broad market index. For portfolios with multiple asset classes, the benchmark could be composed of several indices in the appropriate proportions. Examples of portfolio benchmarks appropriate for Canadians are the FPX Indexes.

The FPX Indexes

In 1997 the National Post newspaper decided that all Canadian investors needed a benchmark based on a typical Canadian investor holding a properly diversified portfolio and sensitized to the investor’s risk tolerance. Richard Croft and Eric Kirzner developed a set of three risk-adjusted indexes – one each for Income (Conservative), Balanced, and Growth investors. These three indexes were reported daily in the “FP Investing” section of the National Post and have become accepted as standards in the industry.[2]

The three Financial Post Indexes ("FPX Indexes") constructed by Richard Croft and Eric Kirzner[3] were designed to provide investable benchmarks for measuring portfolio performance. The three indexes are the FPX Growth, FPX Balanced, and FPX Income, and are designed to for Growth, Balanced and Income (Conservative) investors, respectively. These provide starting points for possible asset allocations for Canadian investors. The following table is simplified from a 1998 National Post article by Kirzner:[4]

Asset class Growth Balanced Income
Cash 10% 10% 20%
Canadian bonds 20% 40% 50%
Canadian equities 35% 25% 25%
US equities 15% 10% 5%
MSCI EAFE equities 20% 15% 0%
Total 100% 100% 100%

Being investable indexes, any investor can buy the investments that make up the index. For many years daily values could be obtained from the Financial Post markets webpage, but at an unknown point in the past the Financial Post stopped making them available online. Historical returns are available are calculated and reported by the Croftgroup.[5]

Your personalized benchmark

Suppose that your investments returned 6.3% in 2016. Is this good or bad? To find out, you ideally need to compare your results to a personalized benchmark that reflects your asset allocation.

Return for each asset class

Suppose your portfolio contains 40% Canadian bonds, 20% Canadian equities, 20% US equities, 15% international equities and 5% real estate investment trusts (REITs). You need to find out the total return of the relevant index for each asset class, in Canadian dollars.

You can consult the Periodic table of annual returns for the major asset classes: for calendar year 2016 this shows +1.7% for bonds (All bonds), +21.1% for Canadian Equities (TSX), +8.6% for US equities (S&P500), and -1.5% for international equities (EAFE).

If an asset class is missing from the periodic table, you can find out the index return on the website of an exchange-traded fund (ETF) provider: here for REITs you find out that the 2016 return for the S&P/TSX Capped REIT Index, which the ETF XRE tracks, was +17.6%.

Benchmark return

You then calculate a weighted average index return, using the asset class weights and their yearly returns. In our example we have:

40%(Can Bonds)*1.7% + 20%(Can stocks)*21.1% + 20%(US stocks)*8.6% + 15%(Intl stocks)*(-1.5%) + 5%(REITs)*17.6% = 7.3%.

So you underperformed your personalized benchmark by 1.0% for 2016. Time to start thinking about why!

See also

References

  1. Investopedia, benchmark definition, viewed January 16, 2015.
  2. "Croft Financial Post Index". https://www.croftgroup.com/croft_financial_post_index.php. Retrieved November 30, 2017.
  3. Richard Croft and Eric Kirzner. Financial Post Indexes, viewed November 22, 2017.
  4. Eric Kirzner, FPX - Financial Post Indexes, National Post, November 2, 1998
  5. "Croft Benchmark Performance". https://www.croftgroup.com/croft_benchmark_performance.php. Retrieved November 30, 2017.

External links