Roberto Anzellotti @IlMatematico: "UNIVERSAL OR CUSTOM BENCHMARK? HERE’S..."

Italy

UNIVERSAL OR CUSTOM BENCHMARK? HERE’S WHAT REALLY MATTERS Today, let’s talk about benchmarks, a topic often debated even among professionals. A benchmark is a point of reference. It helps us understand whether a portfolio is actually creating value by comparing its results with something measurable. Without a benchmark, a positive performance may always look good, but that does not necessarily mean it really is. Making +10% when the market is up +3% is one thing. Making +10% when the market is up +25% is quite another. A benchmark, therefore, is not used to judge an investment in absolute terms, but to place it in the right context. On this topic, there are two different views. Some argue that the benchmark should be unique and universal: a large global index, simple, transparent and the same for everyone. According to this view, every portfolio should prove its ability to beat a broad and easily replicable reference, such as a global equity index or a major US index. The advantage of this approach is clarity: everyone is measured with the same yardstick, without benchmarks built “ad hoc” to make the comparison easier. On the other hand, some argue that the benchmark should be consistent with the portfolio being measured. A 100% growth equity portfolio cannot be evaluated in the same way as a balanced portfolio, a dividend strategy, a multi-asset portfolio or a strategy with a crypto component. In this view, the correct benchmark is not necessarily the most famous one, but the one that best represents the risk profile, time horizon and actual composition of the portfolio. Classical financial literature, in reality, does not provide an ideological answer. On one side, models such as the CAPM start from a broad market reference, because the goal is to measure risk-adjusted returns relative to the market. This is where concepts such as beta, alpha, Sharpe ratio, Treynor ratio and Jensen’s alpha come from. On the other side, performance attribution and professional portfolio management place great importance on having a benchmark that is consistent, investable, transparent and representative of the strategy actually being followed, with the ultimate goal of measuring the added value generated by the portfolio manager’s stock picking. Here too, as often happens in finance, there is no single right answer for every circumstance. It depends on what you want to measure. That said, I was very interested in one of the many apps recently available in the eToro App Store, which measures our portfolio against a synthetic benchmark built specifically for each individual portfolio. In the case of my portfolio, the app defined the reference benchmark as follows: ETF Financial: 19% $NSDQ100: 15% $SPX500: 32% $BTC: 12% ETF Consumer: 12% ETF Healthcare: 7% ETF Industrial: 2% I found the results of my portfolio, measured across different time horizons, very interesting and, in some ways, encouraging. Let’s have a look: 6 MONTHS Return: 3.64% my portfolio vs 1.38% benchmark Alpha: +2.27% 1 YEAR Return: 10.64% my portfolio vs 8.89% benchmark Alpha: +1.76% 2 YEARS Return: 28.84% my portfolio vs 27.44% benchmark Alpha: +1.40% 5 YEARS Return: 92.61% my portfolio vs 62.24% benchmark Alpha: +30.37% In the chart attached to this post, you can see the graphs across the different time horizons. In practice, over every measured time horizon, we beat the benchmark created by the app, therefore by a neutral third party. Moreover, in 3 out of 4 measured periods, we also achieved our goal of outperforming the benchmark by at least 1% per year. Of course, when I personally refer to my benchmark, I usually mean the $SPX500. Still, it is good to know that we are also able to beat a customised benchmark. The app I tested for this experiment is called Pinfolio and was created by @TimothyAssi, one of the most prolific Pro Investors in developing apps for the eToro Store. You can find the link to the app in the first comment. I am @IlMatematico, and through my investment process I try to compound value from the markets over the long term. Add me to your watchlist to follow my strategy, portfolio moves and thoughts on $BTC, $SPX500 and $NSDQ100.

Not investment advice. The author may have financial interests in the mentioned instruments.