When should you use benchmarks to evaluate your portfolio?

The rapid development of digital wealth platforms has made investing much easier for individual investors. Templated, multi-fund portfolios offered by banks, roboadvisors and wealth platforms have improved access to investing, allowing investors to choose products based on their goals and risk tolerance without the tedious process of securities selection.

However, as an investor, you still have to make a choice: which products are most likely to get you to your goals? Say, two equities-only portfolios offered by two different wealth companies may appear the same on the surface, but nuanced differences like constituents, degree of diversification, and fund manager investing styles can yield very different results.

And if you are already invested, how do you assess whether your portfolio is doing what it is supposed to do—getting you on track to your goals? 

Is the highest-returning portfolio the best portfolio? Think again

A common mistake that investors make is to focus only on returns. While this is the most obvious metric to compare against the numbers on your Excel sheet of goals, there are other factors you need to consider to assess the suitability of an investment product.

The Endowus Insights team sat down with Jasmine Chan, Investment Advisory Director at the Endowus Investment Office, to understand how investors should properly assess suitability and performance of investment products. Jasmine creates multi-asset, bespoke investment solutions across public and private markets for high-net-worth individuals, family offices, and non-profit organisations, including charity organisations and foundations in Singapore. 

In our conversation, he breaks down the role of benchmarks in unit trusts and portfolios, and highlights the importance of evaluating product suitability based on risk and returns—not just returns alone. Read on to find out how you can give your own portfolio a fair evaluation.

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What are benchmarks, and how should they be used?

Q: Do all funds have a benchmark? How are they used?

Jasmine: Not all funds have a benchmark, and how a benchmark is used broadly depends on how the fund is managed.

For passive funds, like a passive index fund tracking the S&P 500, the benchmark is the index itself. The fund's objective is to replicate the index’s performance as closely as possible. We measure its success by its tracking error — the lower the tracking error, the better the fund is fulfilling its objective.

For actively managed funds, it's more complex. Many are “benchmark agnostic” because their goal isn't to follow an index, but to achieve a specific objective, such as capital appreciation, better downside protection, or diversification. While they don’t track a benchmark, their fund factsheets may show a reference benchmark to help investors see how the fund has performed relative to the broader market.

The most direct way to assess the performance of a benchmark-agnostic fund is to assess whether it has achieved its objective. We can also compare it against its peers, which are other funds with a similar investment objective and strategy. 

Q: What about alternatives, such as private market funds and hedge funds?

Jasmine: Finding a relevant benchmark is challenging as data in private markets and the hedge fund space can be more opaque compared to the public markets. While benchmarks, if available, can be used as a reference point, we should take the relative performance between the fund and the benchmark with a pinch of salt. 

This is because of performance dispersion—the performance gap between the top- and bottom-performing managers is much wider than in public markets. A high quality hedge fund manager can generate performance that is substantially better than a broad hedge fund market index. Their expertise, network, and access to information are what create this value. 

Therefore, a key part of our due diligence is focused on identifying top managers with a proven track record.

Q: Beyond just comparing returns, what other roles do benchmarks play?

Jasmine: There are a few other uses for benchmarks besides comparing only the returns:

1. Diagnosing performance: Benchmarks help you understand why your portfolio performed the way it did. For example, if your global equity portfolio underperformed the MSCI World Index, you might find that it’s because your portfolio is a lot more diversified, while the index's gains were driven by a handful of large US tech stocks.
2. Assessing diversification: Benchmarks can help you measure how effectively an investment diversifies your portfolio. For example, if you add a fund that is meant to have a low correlation to the stock market to build a more robust portfolio with overall lower volatility, you can compare its performance against a broad equity benchmark across a period. If the portfolio volatility falls, the new fund is likely fulfilling its role as a diversifier.
3. Stress-testing: Broad market indices show us periods of market distress and how different asset classes performed during crises. We can zoom into the performance of our portfolio or funds during these periods to assess the potential drawdowns and evaluate if it is aligned with our risk tolerance. 

Beyond benchmarks: What to consider when assessing funds

Q: What do you wish more investors would consider when assessing funds?

Jasmine: Always go back to your investment objectives, horizon, and risk tolerance. It’s easy to get caught up in daily market fluctuations, but you must always bring it back to the role each investment plays in your overall portfolio.

Some funds are designed to provide diversification and protect the downside during market downturns. In a strong bull market, these funds might underperform equities, and an investor looking only at returns might be disappointed. But if they recall the fund’s objective—to act as a stabiliser—they’ll understand it is performing as it should.

Your goals and “why” for investing in a certain portfolio or fund should always be the anchor.

Q: When there are multiple similar funds, how should an investor choose the right one?

Jasmine: There are thousands of funds available, which can make it challenging for investors to choose. While Endowus has already curated a list of what we believe are best-in-class funds on our fund platform, Fund Smart, investors still need to make choices. 

Investors can use the comparison tool on our Investment Funds List. These are the main things you should look at:

1. Returns and volatility: Look at the performance chart over a long period to assess growth potential. Pay close attention to the volatility too, which is one way to assess how risky a fund is and whether its risk profile aligns with your personal tolerance.
2. Portfolio breakdown: Check the fund’s allocation by sector, geography, and its top holdings to assess if the degree of diversification matches what you are looking for.

You can also refer to our selection criteria, where the Endowus Investment Office explains why the fund was shortlisted on Fund Smart. This summary presents the fund manager's track record, and also gives recommendations for the investor profile that is most suited for that specific fund.

Take note of the risk warnings, and there are also advanced risk-return metrics for more savvy investors. If there are doubts, don’t hesitate to reach out to our client advisors for help.

How to do a fair assessment of your portfolio’s performance 

Q: What is the right time frame for investors to review their portfolio's performance against a benchmark? 

Jasmine: The period of comparison should always correspond to your personal investment horizon.

If your goal is long-term, such as retirement in 10 years, you should focus on the long-term performance track record. We prefer looking at a period of at least five to ten years. A decade-long view is ideal because it smooths out short-term market anomalies—like the downturn in 2022—giving you a more representative picture of the portfolio’s performance.

Short-term volatility is normal and expected in the markets. As long as the long-term performance remains on track with your goals, short-term underperformance isn't typically a cause for concern.

Q: Any last words of advice for investors?

Jasmine: Use benchmarks appropriately—assess what the role of a benchmark is for the fund. In terms of portfolio performance, don’t get too caught up with short-term volatility if your objective is long-term. A long-term view smooths out short-term market anomalies and gives you a more representative picture of the portfolio’s performance.

Finally, don’t look at returns in isolation from risk. You must always ask, “For the returns I'm getting, how much risk am I taking?” Returns and risk are two sides of the same coin—you must first be able to stomach volatility to reap the rewards.

Our investment philosophy

The Endowus Investment Office goes through a rigorous, institutional-grade due diligence process for every fund available on the Fund Smart platform, assessing both quantitative and qualitative factors, from performance consistency to manager expertise.

We use a Strategic Passive Asset Allocation (SPAA) approach to construct portfolios that match the unique goals, risk tolerance and time horizon of every investor. Our Flagship Portfolios are invested in funds that provide global exposure through thousands of securities. Each Portfolio aims to track its respective benchmarks for long-term growth, and we share portfolio performances on a quarterly basis. 

If you would like to learn more about our products or assess suitability of your investment portfolio, feel free to reach out to our SFC-licensed client advisors.

As your conflict-free advisor, Endowus is committed to helping you achieve better investment outcomes. Get started on your wealth journey with Endowus Hong Kong today. Sign up here.

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Risk Warnings

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