Evaluating investment performance requires unbiased, accurate data
Most recordkeeping firms provide investment “benchmarking ” reports to their clients. Such reports compare each investment to a peer group or stated index (benchmark). This index is probably the same for all other peer group investments. While benchmarking reports are useful, there is more to determining if a particular fund belongs in a pension or retirement plan’s lineup than investment returns.
Benchmarking overlooks qualitative factors
The need for more documentation than benchmarking alone is essential in deciding if an investment vehicle should be retained, especially in over-populated asset classes. The large capital growth mutual fund category is a prime example of a crowded asset class. Most institutional portfolios have at least two options in this category, and many have three. If a committee uses benchmarking alone to substantiate its decisions, then one or more investment options are not going to be deemed prudently supervised.
Investment policy should put benchmarking in its proper place
Most investment policy statements don’t go into enough detail beyond asset class definitions. More detail is needed, and documenting its source is key. A simple example is if you go to a car lot and look at the outside of a vehicle, you may see the same make and model sitting next to it. But it’s only when you sit down in the vehicle and analyze the sticker’s features that you can discern the differences.