Financial Blog

Investing isn’t simply putting your money on a good stock or fund, even more important is keeping track of your performance. One way we can do this is by Benchmarking.

What is a Benchmark?

It is a standard against which the performance of your portfolio or skill of your fund manager can be measured. Typically, you see this when you talk about the portfolio Return on Investments (ROI). When the ROI is compared against the Benchmark, it helps you put your returns into perspective whether your portfolio is doing better or worse than the Benchmark.

What else can you Benchmark?

Aside from the ROI, you can also Benchmark the Duration. This will only apply if you have fixed-income securities in your portfolio.

If Benchmark ROI looks at the returns, you can also look at the Benchmark Duration. For a fixed income portfolio, Benchmark Duration is commonly used. Duration is usually expressed in terms of the number of years and measures two things: Sensitivity/Volatility, and the Average length of time remaining until the maturity of the bond portfolio.

Is there only one Benchmark? Which one do you use and how do you use it?

The short answer is no. Choosing an appropriate and measurable Benchmark depends on how you plan to construct your portfolio. You have to compare apples to apples.

To better understand this concept, let’s review some of the examples below:

1. You’re 100% invested in domestic blue-chip stocks and you want to compare how your portfolio is doing, what do you do?

You can use the Philippine Stock Exchange Index (PSEi) as your Benchmark. Information about the PSEi returns is available on the PSE website. A word of caution, be careful of the time period. If your portfolio ROI is for the period of FY2021, get the PSEi prices for the comparative time frame.

2. You’re 100% invested in fixed income securities, what do you use now?

This is where knowing your target Duration and Composition becomes key. If you have a target portfolio Duration of 5 years and you are 100% invested in government securities, you can use the Markit iBoxx Albi 1-5 Philippines.

What if you have a mixed portfolio? You can use both! Just weigh it accordingly. If you are 50% weighted in both, just multiply each by 50% and add up!