Benchmark Selection and Portfolio Performance

As an owner, what is a purchasable alternative investment to your existing portfolio that may be preferable with less work? Benchmark portfolios are market alternatives to managed portfolios and typically have lower expenses and are usually passive with respect to active asset allocations. A substantial amount of research has concluded that they may also have preferred risk and return properties to actively managed portfolios.

The benchmark choice is a critical component of reliable performance monitoring and analysis. The benchmark must represent a market traded alternative to the managed portfolio, and it must be regarded by the owner as a realistic candidate for ownership. Small changes in the benchmark, such as the inclusion of fixed income assets, can significantly affect the performance of the benchmark. Detailed analysis is required for both risk and return.

The preferred portfolio depends on the proper analysis of their comparative performance. RoboPPA™ provides a World stock benchmark, and US and Canadian stock and fixed income benchmarks, that may also be combined into an investible benchmark portfolio. It also allows the user to specify up to three additional benchmarks from the list to show some of their risk and return properties without a full performance analysis.

Common Errors in Benchmarking Performance Analysis

• Not using a benchmark

• Choosing a benchmark that does not coincide with your Risk Preferences and Tolerance

• Selecting an Analysis Period that is too small to distinguish true performance differences between the portfolio and the benchmark

• Using an analysis tool that does not comment on the probability of outperformance due to luck in short analysis periods

• Using an analysis tool that does not perform Significance tests of Statistical differences between the portfolio and the benchmark

• Using different Data Periods for the portfolio and the benchmark

• Using an analysis tool that does not correct the benchmark for Transfers and Fees

• Using an analysis tool that does not consider hedging against Economic Factors such as inflation, market volatility, foreign exchange rates, economic growth, and interest rates

• Using performance criteria, such as Time-Weighted Return, Alpha, and Beta, for inappropriate comparisons

RoboPPA™ performance analysis avoids or warns of these errors.

A significant advantage of RoboPPA™ is that the required inputs for its performance analysis can be saved in its template and updated monthly. This can be done entirely on the user’s computer and never stored on the software’s servers. RoboPPA™ maintains and updates the benchmark database thereby reducing the user’s work. Finally, the software allows analyses over any selected period contained in the data template’s horizon, providing it exceeds eight months.

Caveats

The analysis and the results in this document are not to be interpreted as representative of real markets and asset classes and are not warranted to be correct or complete. The example is based upon our opinion and interpretation of the data and results, which may be incomplete or incorrect. RoboPPA™ or the data suppliers are not responsible for any damages or losses arising from use of this blog. Details on the performance calculations are available on www.RoboPPA.com.