Total Portfolio Benchmarking
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Total portfolio-level benchmarking for institutional investment pools can be approached in a variety of ways, based on which goals fiduciaries are attempting to achieve with each comparison. There are different types of benchmarks that can be used to accomplish specific goals. Portfolio-level benchmarks are typically based on (1) an institutional portfolio’s asset allocation, e.g., an asset-weighted policy or dynamic policy benchmark, (2) an investable, passively-managed index, such as a 60/40 equity and bond mix, (3) a comparison to institutional peers, and/or (4) an institutional financial objective of the portfolio’s returns, e.g., a specified nominal or real (inflation-adjusted) rate of return. Each type of benchmark presents various challenges and requires some amount of investment knowledge to grasp the implications underlying each comparison. This can create communication gaps for fiduciaries and various interested parties, such as retirement plan participants and beneficiaries. If an investment out- or under-performs its benchmark over an appropriate measurement period, investors should understand why it happened, whether it was to be expected, and most importantly what it signifies for doing anything differently – since in the end a metric is only useful if it feeds back into a decision process.
