Soundings

Institutional investment programs typically adopt multiple benchmarks for measuring investment outcomes.

An institution balancing the obligations of both current and future spending may set a goal of growing its corpus in excess of spending and inflation. Accordingly, the Consumer Price Index (CPI) – or another inflation proxy like the Higher Education Price Index (HEPI) – plus a defined rate of spending – often serves as a benchmark for ensuring that endowments span generations.

Additionally, an institution might look to understand the success of its investment program by isolating the impact of active decision-making:

A Policy Index, or benchmark based on an organization’s long-term asset allocation policy, assigns policy weights and a proxy benchmark, such as the Russell 3000 Index for domestic equity, to each asset class. Comparing a portfolio’s performance to a Policy Index measures the impact of deviations from the long-term policy weights, as well as the impact of any active management, the degree to which a domestic equity portfolio might out- or under-perform the Russell 3000 Index. Floating the weights of the components in the index can control for allocation differences, giving the investor a measure of pure active management success.

A Blended Benchmark is another common standard for measuring the performance of institutional and personal investment portfolios. A blend of 60% of the S&P 500 Index and 40% of the Bloomberg US Aggregate Bond Index is a good yardstick for a 60/40% equity/bond portfolio – or of a slightly more complex portfolio with similar risk characteristics.

Peer comparisons, usually via a subset of similar organizations or families, can also serve as a benchmark for performance with an eye towards comparable portfolios or programs. For example, an investor might want to figure consistently in the top quartile of its peers for performance.

Or investors may look to risk-adjusted returns to understand how well they are compensated for assuming incremental risk in the portfolio.

Benchmarking doesn’t stop at performance. Any number of investment outcomes – risk, fees and expenses, liquidity, sustainability and impact – may be benchmarked.

And the timeframe over which performance is considered can be equally as important as the benchmark(s) selected. It’s reasonable to expect that even portfolios that generate outperformance over extended periods experience underperformance from time to time. The proper timeframe is, like each of these custom benchmarks, unique to the investor.

Does all of this benchmarking lead to better outcomes?

We could write a separate (lengthy) post titled Benchmarks Gone Wrong. But investors thoughtfully adopting benchmarks and timeframes that reflect their unique goals and objectives, have an indispensable tool for holding themselves, their portfolios, and their advisors accountable.

Tide Cycle Resources (Tide Cycle) is an investment advisor registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. A copy of Tide Cycle’s Forms ADV Part 2 and Form CRS are available without charge upon request. The opinions expressed are those of Tide Cycle. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future. This should not be taken as specific investment advice. We recommend consulting an investment/tax professional before making financial decisions based on any information provided.

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