Point out volatility. If you look only at the benchmark returns, you are missing crucial information. Markets regularly experience clusters of high volatility affecting each asset class in different ways. During these episodes, balanced portfolios with diversification in multiple asset classes fulfill their mission of better stability. When comparing asset classes or analyzing a balanced portfolio, contrast the losses occurring for each index during these adverse episodes, possibly with a maximum draw visual or a volatility chart.
Use a “blended” benchmark. There is no readily available index that can be used to benchmark a portfolio because each portfolio has a specific mix of asset classes. However, you can compose a blended benchmark with the indexes, using the asset class weights as defined in the client’s policy statement. Easy-to-use tools exist to quickly assemble blended benchmarks. Beyond client communication, blended benchmarks are useful as a management tool: You can use them in assessing performance of a fund that is hard to classify in any style because it holds investments across asset classes.
Prepare your benchmarks. This part demonstrates the most important buy-in, which is the measurable component of Samurai. Once your client is familiar with benchmarks, educate him on why they are useful not only for past performance analysis, but for future planning purposes. In agreement with your client, this specification in the policy statement sets the right expectations and ensures a fair review at the end of the year.
In conclusion, benchmark methodologies, Samurai or otherwise, are important for portfolio performance review, forward planning, and your selection of investments. Benchmarks, albeit dynamic and interactive, act as a reference and a key component to educating and communicating with clients.
1 Managing investment portfolios: A dynamic process, Maginn, Tuttle, Pinto, McLeavey.
Christophe Gauthron, CFA is the Founder of Kwanti, a software provider to financial advisors and institutions.