Tweaking my Portfolio Benchmark

The first attempt at creating a benchmark for my portfolio performance produced figures that pass the reasonableness test. But the benchmark would better represent my asset mix if I changed it from 50% Australian stocks to 30% Au stocks and 20% International. It still won't be an exact match the my portfolio, but it should be good enough to show if my particular investment choices (eg. specific stocks, particular properties in Sydney) are producing adequate returns for the level of risk associated with those asset classes.

Getting some additional data from the latest CBC FInancial Advisor's Investment Market Review provides the following benchmark:

Benchmark^:
50% - Property (Australian House Prices, Sydney median annual values from REIA)
30% - All Ordinaries Accumulation Index.
20% - MSCI World Shares Ex Australia, Accumulation Index in $A.

Data (Quarterly figures up to 31 Apr 08):

1-year 3-year 5-year
% pa % pa % pa
--------- ---------- ----------
50% Property - Syd 2.70% -0.99% 3.21%
30% All Ords Accum. -4.56% 17.39% 18.40%
20% MSCI World ex Aus. -14.46% 5.24% 5.86%

Overall, ungeared -2.91% 5.77% 8.30%

CPI 4.24% 3.22% 2.80%

Cash rate 7.10% 6.39% 5.99%

Approx Loan int rate 9.10% 8.39% 7.99%

Benchmark (50% LVR) -14.92% 3.15% 8.61%

My Portfolio -5.26% 8.06% 11.46%

Using this benchmark my portfolio performance looks much better! If nothing else, it shows that for a meaningful analysis of fund manager or portfolio performance you need to be referencing a valid benchmark. Of course, unless you're looking at an Index Fund (which attempts to minimise tracking error and fees), there will always be deviations from the benchmark caused by the investment decisions being taken. Hopefully the choices add the returns rather than reduce them. It's all too easy to create a drag on your portfolio performance by "churning" your holdings and adding unnecessary transaction fees.

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