Podcast: Choosing The Right Benchmark: Measuring Investment Performance In Context

When investors talk about performance, they often focus only on returns. However, returns on their own provide limited insight. Without context, it is difficult to determine whether an investment outcome was strong, weak or simply in line with expectations. 

In this episode of the Ghost Stories podcast, The Finance Ghost speaks to Siyabulela Nomoyi, Quantitative Portfolio Manager at Satrix, about why benchmarks matter, how they are used in investment management and why selecting the right benchmark is one of the most important decisions an investor can make. 

What Is A Benchmark? 

A benchmark is a standard used to measure and compare investment performance. 

It provides a reference point against which investors, portfolios and fund managers can assess outcomes. Some investors seek to outperform a benchmark, while others aim to match it as closely as possible. 

A well-chosen benchmark performs several functions simultaneously. It establishes a realistic performance expectation, helps define the level of risk being taken and creates accountability by allowing outcomes to be evaluated relative to an agreed reference point. 

Why The Mandate Matters 

According to Siyabulela Nomoyi, choosing a benchmark starts with understanding the investment objective. 

Whether the goal is saving for a wedding in six months, funding a child's education many years into the future or meeting pension fund liabilities, the benchmark should reflect the purpose of the investment. 

The investment mandate effectively answers three questions: 

• What is the money for? 
• When will it be needed? 
• What level of risk is acceptable? 

These considerations ultimately influence which benchmark is most appropriate. 

Benchmarks Are Not Always Indices 

Many investors associate benchmarks with market indices such as the S&P 500 or the FTSE/JSE Top 40 Index. However, benchmarks can take many forms. 

• Inflation-based targets 
• Liability-driven benchmarks 
• Peer-group averages 
• Performance hurdles used in certain investment strategies

The most suitable benchmark depends on the objective of the portfolio and the outcome being measured. 

Understanding Benchmarks Through ETFs 

ETFs provide investors with access to investable benchmarks. 

By tracking a specific index, an ETF allows investors to gain exposure to a defined market, sector or investment theme. 

Understanding the benchmark behind an ETF is therefore critical. Investors should consider: 

• What market the index represents 
• How constituents are weighted 
• Whether concentration risk exists 
• How frequently the index rebalances 
• The costs associated with tracking the benchmark 

The benchmark should clearly align with the investment exposure an investor is seeking. Investors can explore the Satrix ETF range for examples of ETFs that track different indices and market exposures. 

Does Beating The Benchmark Always Mean Success? 

Outperforming a benchmark is often viewed positively, but Siyabulela Nomoyi cautions that context matters. 

A portfolio can outperform a benchmark while still failing to achieve its intended objective. This may occur when the benchmark itself is poorly selected or does not reflect the investor's real needs. 

Similarly, some managers may remain too close to a benchmark, limiting meaningful differentiation despite charging active management fees. 

Performance should therefore be evaluated relative to a benchmark that aligns with the intended outcome. 

Diversification And Benchmark Construction 

A well-constructed benchmark should provide meaningful diversification. 

Concentration risk becomes a concern when a small number of securities dominate an index and disproportionately influence returns. 

Investors should understand: 

• How an index is constructed 
• Whether market-cap weighting introduces concentration risks 
• How diversification is achieved 
• Whether the benchmark reflects the exposure being sought 

Understanding the benchmark ultimately helps investors better understand the investment itself. For investors looking to access investments online, they can invest through SatrixNOW as part of their broader investment process. 

Conclusion 

Benchmarks are more than performance scorecards. They shape expectations, define risk and provide the context needed to evaluate outcomes meaningfully. 

Whether investing through actively managed funds or ETFs, selecting the appropriate benchmark remains one of the most important decisions in the investment process. 

Key Takeaways Include 

Benchmarks Provide Context: Returns alone do not tell the full story. 

The Investment Objective Comes First: The benchmark should reflect the purpose of the investment. 

Benchmarks Take Different Forms: An index is only one type of benchmark. 

ETFs Offer Access To Investable Benchmarks: Understanding the benchmark helps investors understand the product. 

Beating A Benchmark Is Not Always Enough: Success depends on whether the benchmark aligns with the intended outcome. 

Diversification Matters: Benchmark construction can influence concentration risk and portfolio exposure. 

Closing Thought 

A benchmark should not simply be easy to measure. It should accurately reflect the objective it is intended to evaluate. 

Listen to the full episode and explore the key insights here.

Disclaimer 

Satrix Managers (RF) (Pty) Ltd is a registered and approved Manager in Collective Investment Schemes in Securities. Collective investment schemes are generally medium- to long-term investments. With Unit Trusts, Exchange Traded Funds (ETFs) and Actively Managed ETFs (AMETFs), the investor essentially owns a “proportionate share” (in proportion to the participatory interest held in the fund) of the underlying investments held by the fund. With Unit Trusts, the investor holds participatory units issued by the fund while in the case of ETFs and AMETFs, the participatory interest, while issued by the fund, comprises a listed security traded on the stock exchange. ETFs and AMETFs are registered as a Collective Investment and can be traded by any stockbroker on the stock exchange, LISP platforms and / or via online trading platforms. ETFs and AMETFs may incur additional costs due to being listed on the JSE. Past performance is not necessarily a guide to future performance, and the value of investments / units may go up or down. A schedule of fees and charges, and maximum commissions is available on the Minimum Disclosure Document or upon request from the Manager. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Should the respective portfolio engage in scrip lending, the utility percentage and related counterparties can be viewed on the ETF and AMETF Minimum Disclosure Document. AMETFs are ETFs are actively traded by a Portfolio Manager to adjust the AMETF holdings and asset allocation with the aim to outperform the benchmark. AMETFs differ from ETFs which only track indices. The Manager does not provide any guarantee, either with respect to the capital or the return of a portfolio. The index, the applicable tracking error and the portfolio performance relative to the index can be viewed on the ETF and AMETF Minimum Disclosure Document and/or on https://satrix.co.za/products.