Portfolio Benchmarks: What’s the Fuss?

Why benchmarks are so basic—and important—to asset management communications.


By Karen Hazel, Esq.
Owner & Principal
Hazel Communications LLC



In the everyday lingo of portfolio managers, perhaps nothing takes center stage more prominently than the concept of benchmarks.

This is not surprising, given the increasingly competitive and scrutinized world in which asset managers operate. But since a good communicator strives for fluency in the language of the business he or she communicates to the public, it is essential you understand as much as possible about this fundamental and frequently talked-about topic.

To begin, when serving the asset management community, it is absolutely essential to know the benchmark against which each manager is measuring his or her performance. Sounds simple—yet many marketing and communications professionals fail to do this simple yet critical preparatory work. The excuses abound: benchmarks change frequently, it’s time-consuming to look up the benchmark for each fund in a large fund family, and information can be elusive, at best. While all of these reasons hold some merit, if you embark on an interview with a fund/portfolio manager and you don’t know or understand the designated benchmark that applies, you will miss a critical contextual aspect of your conversation and run the risk of making mistakes.

There are two uncontestable sources that will help you confirm a fund or portfolio’s benchmark: the prospectus (make sure it’s the most current version), or the manager him/herself. If the manager seems unsure or cagey when asked to confirm a fund’s benchmark, he/she isn’t necessarily being difficult. Often, what an asset manager argues should be the most appropriate benchmark for a given fund is simply not the established index according to prospectus. Keep this possible discrepancy in mind. Remember too: Some asset managers may allow one benchmark to go on record as the “official” or primary benchmark, but in practice, they measure against a “secondary” or unofficial index. When in doubt, ask.

Once you uncover the facts, create a “living document” that lists each fund or portfolio and its benchmark—and keep it current. You may want to check in with your group of managers each quarter and say, “Any notable changes to the XYZ Fund that we here in Marketing should know about?”

Know – Really Know – the Benchmark

 To create effective marketing materials based on a well-conducted interview, you need to know more than the name of the index. Do some research. What does the benchmark consist of? Despite the number of times “the S&P 500 Index” is cited in marketing-related materials, how many marketing professionals can list the industry sectors represented within the S&P? The one who does will immediately stand apart from the crowd and gain the confidence and respect of the asset manager.

Research the major equity and fixed-income benchmarks as a short, digestible over-the-lunch-hour project. Compare what makes the Wilshire 5000 different from the S&P 500, besides the sheer number of stocks that comprise it, and keep a cheat sheet. It’s not necessary to know the details off the top of your head; but a little research can help you know the right questions to ask in a given situation and demonstrate that you’ve done your homework.

Check the Sites

 Simply logging onto www.standardandpoors.com offers a wealth of knowledge. First, you’ll see the incredibly diverse and deep list of indices Standard & Poor’s offers. You’ll be able to dig a bit deeper into the indices that apply to your managers’ funds, if applicable. Search out at the very least, the sectors, the methodology, the approximate number of holdings, and even the individual stocks held under each sector. In time, you’ll begin to recognize names and sectors your managers speak of when discussing performance attribution.

You can do this for Russell indices, Lehman Brothers, and just about any major market-recognized index against which asset managers benchmark their performance.

Tips on Understanding Benchmarks

  •  All benchmarks are not equal, even if they are comprised of similar types of stocks. For example, a large-cap stock index from one company may not bear much resemblance to another company’s large-cap index, and for a number of reasons. Similarly, don’t assume the sectors as represented in the S&P 500 Index will be identical to those found in a Russell index. Sectors are often similar, but if you want to know your stuff, be aware that what Russell calls its sectors may or may not exactly echo the monikers Standard & Poor’s employs. “Telecom” in one index may be cited as “telecommunications services” in another, and so on. Seem trivial? Not to a portfolio manager.
  • Keep in mind that most indices are reconstituted at least annually to reflect changes in the marketplace.
  • Understand how each index calculates its total return. For the S&P 500, total returns are calculated by adding the dividend income and price appreciation for a given time period. Total returns for most all S&P Indices are calculated similarly; an indexed dividend return is added to the Index price change for a given time period. However, Russell may employ a different approach. Search under “Methodology” at each proprietary web site to see how total returns are calculated.
  • Benchmarks change, as does the market. Keep current at least quarterly by checking the sites of your most frequently used indices and search under “News” or the like. You’ll probably find the most recent press releases on any changes to the benchmark, and why they were made.
  • Know the purpose of the benchmark. Does it aim to replicate the broad equity markets in the U.S.? How so? Does the benchmark blend investment styles (value versus growth) as well as market capitalization? If so, what is the overall breakdown?
  • Be aware if the benchmark is a “subset” of a larger index.
  • Have an idea each week of how benchmarks are performing, at the very least, YTD. This factor will make your life immeasurably easier when interviewing portfolio managers and drafting commentaries.
  • Have a general idea of the maximum and minimum market capitalization allowable within each benchmark. For example, as of May 31, 2005, the largest market – cap for a company within the S&P 500 was nearly $387 billion, while the smallest was $544 million. This will help give you a sense of the types of stocks the index “invests” in.

The Goal: Excellence in Communications

At the end of the day, our job is to help corporate clients successfully bring their products to market and appeal to customers strongly enough to induce them to buy. It doesn’t matter if your client or company is selling mutual fund shares or surfboards. However, the investment management universe admittedly demands a specialized knowledge on the part of its marketing and communications professionals. Benchmarks are a great starting point in terms of understanding the business, your company’s offerings and the unique challenges facing the asset managers you support.


© 2012 Hazel Communications LLC. This article is for informational purposes only. It is not intended as career, legal or investment advice or for advisory purposes. This article may not be reprinted or repurposed without express permission by Hazel Communications.