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5. Measuring Performance Against The S&P 500
When does beating the S&P 500 by 5% make a manager a poor performer? When the manager’s strategy is significantly different from the S&P 500 it might. One example would be if that manager ran an international portfolio in 2006.
In 2006, the S&P retuned 15.8%. However, the appropriate international benchmark – MSCI EAFE – was up 26.9%. If an international manager returned only 21% he would have beat the S&P handily, but not done so well against his peers. (MSCI EAFE stands for Morgan Stanley Capital International Europe Australasia and Far East index. It is the appropriate benchmark for most diversified international funds.)
Another example might be a manager of a balanced portfolio of stocks, bonds and cash. This manager seeks to reduce risk by placing money in more than one asset class. This strategy is inherently less risky than the 100% large cap equity composition of the S&P 500. It would be expected to produce a lower return on average because it is less risky. In this case a blended benchmark that reflects the asset mix of the manager might be a more accurate point of comparison.
The S&P 500 is a useful benchmark for choosing a large cap core manager. However, for other strategies, comparing a manager’s performance against the S&P 500 is irrelevant. The S&P 500 represents only the very largest companies in the US. Different asset classes and styles behave differently and don’t necessary move in the same direction at the same time. For instance managers of small capitalization or mid cap portfolios are better judged against one of the Russell indices.
At WrapManager when we choose managers and monitor their performance, we measure them against an index that is appropriate for that manager’s strategy. When we present their performance to you we display it against a blended benchmark representing the asset classes in your custom portfolio.
For more information, please contact us at (800) 541-7774 or click for a FREE Money Manager and Asset Allocation Proposal today.