A large fund proudly announced recently that its investments returned 7.23% for the first 6 months of the year, against a benchmark of 6.85%.

A look at the investment returns produced by prudential balanced portfolios in our Benchtest performance review reveals that the average portfolio returned 7.67%, while the default portfolio of the Benchmark Retirement Fund returned 9.78%. Clearly, the peer fund does not constitute this fund’s benchmark .

This raises the question whether the trustees should be satisfied with the returns of its fund. If the fund’s benchmark return was 6.85%, the fund has outperformed its benchmark but has underperformed the average of its peers.

Typically trustees would be guided by its investment consultants when constructing a benchmark portfolio that will be used to calculate the benchmark return of the fund.

Do trustees really have an in-depth understanding of how their benchmark portfolio is constructed and how the particular portfolio structure will respond to varying market conditions? Do trustees really know whether the benchmark portfolio truly captures the desired outcomes for the fund’s investments under different market conditions? Should trustees then not be concerned about outperforming their own benchmark, as this may be indicative of the actual portfolio structure taking higher or lower risks than what was intended?

We would suggest that, despite any internal benchmarks, every fund whose membership represents a normal demographic profile, should also measure its performance against that of its peers, which in essence represents ‘best practice’ for funds with a normal demographic profile. Ideally the investment consultant would analyse and explain the difference in performance between the peer manager and the benchmark portfolio.

Comment by Tilman Friedrich.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.