Portfolio Performance vs Benchmark Indices

Explore practical examples of comparing portfolio performance to benchmark indices.
By Jamie

Introduction

In the world of investment, measuring the performance of a portfolio against benchmark indices is crucial for evaluating success and making informed decisions. Benchmark indices serve as a standard for comparison, helping investors assess how well their investments are performing relative to the overall market or a specific sector. Here, we present three diverse examples of comparing portfolio performance to benchmark indices that highlight different contexts and methodologies.

Example 1: Evaluating a Stock Portfolio Against the S&P 500

In this example, an investor has a diversified stock portfolio and wants to measure its performance against the S&P 500, a widely recognized benchmark for U.S. equities. The investor’s goal is to determine whether their portfolio is outperforming or underperforming the index.

The investor’s portfolio shows the following performance over one year:

  • Portfolio Value at Start: $100,000
  • Portfolio Value at End: $110,000
  • Percentage Gain: ((110,000 - 100,000) / 100,000) * 100 = 10%

In comparison, the S&P 500 index had a value of 3,700 at the start of the year and increased to 3,900 at the end:

  • S&P 500 Value at Start: 3,700
  • S&P 500 Value at End: 3,900
  • Percentage Gain: ((3,900 - 3,700) / 3,700) * 100 = 5.41%

By comparing the two:

  • Portfolio Gain: 10%
  • S&P 500 Gain: 5.41%

The investor’s portfolio outperformed the S&P 500 by 4.59%. This analysis shows that the portfolio manager’s stock selection has been effective over this period.

Notes

  • Investors might consider using a more granular benchmark, such as a sector-specific index, if the portfolio is heavily weighted in a particular sector.

Example 2: Measuring a Bond Portfolio Against the Bloomberg Barclays Aggregate Bond Index

For this scenario, a fixed-income investor wants to compare the performance of their bond portfolio to the Bloomberg Barclays Aggregate Bond Index, which represents a broad spectrum of U.S. investment-grade bonds. The investor’s aim is to assess risk-adjusted returns.

The bond portfolio performance is as follows:

  • Portfolio Value at Start: $200,000
  • Portfolio Value at End: $210,000
  • Percentage Gain: ((210,000 - 200,000) / 200,000) * 100 = 5%

The Bloomberg Barclays Aggregate Bond Index had a return of 3% over the same period. Therefore:

  • Portfolio Gain: 5%
  • Bloomberg Barclays Aggregate Gain: 3%

The investor’s bond portfolio has outperformed the benchmark index by 2%. This indicates that the bond selection strategy has added value beyond the general market.

Notes

  • Investors should also consider the duration and credit quality of their bonds in relation to the benchmark for a comprehensive analysis.

Example 3: Real Estate Investment Trust (REIT) Portfolio Versus the NAREIT Index

In this final example, a real estate investor holds a portfolio of REITs and wishes to compare its performance to the National Association of Real Estate Investment Trusts (NAREIT) Index. This index serves as a benchmark for the performance of publicly traded REITs.

The performance details are:

  • Portfolio Value at Start: $500,000
  • Portfolio Value at End: $520,000
  • Percentage Gain: ((520,000 - 500,000) / 500,000) * 100 = 4%

The NAREIT Index, during the same period, reported a return of 6%. Thus:

  • Portfolio Gain: 4%
  • NAREIT Gain: 6%

The investor’s REIT portfolio underperformed the benchmark by 2%. This could prompt a reassessment of the portfolio’s asset allocation or the specific REITs held.

Notes

  • Considering the volatility in real estate markets, investors may want to analyze performance over a longer time frame to get a clearer picture.

These examples demonstrate the importance of comparing portfolio performance to benchmark indices, providing investors with a clear context for evaluating their investment strategies.