Weigh the factors that matter when selecting a benchmark for an equity mandate
The idea
A benchmark must reflect the manager's investment universe and process: its size, style, region and sector exposure should match what the manager actually buys. A good index is rules-based, transparent, investable, specified in advance and measurable. Construction matters: market-cap or float-adjusted weighting, price, equal or fundamental weighting each create different exposures and turnover. Check reconstitution and rebalancing frequency, since frequent changes raise the cost of replication, and check concentration, because cap-weighted indexes can be dominated by a few names. For a client, a mismatched benchmark distorts performance evaluation: a small-cap value manager measured against a large-cap index will appear skilled or unskilled purely because of style. Investability is easy to overlook when judging an index.
In the app: 1 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Overview of Equity Portfolio Management
- Explain what equities contribute to a client's total portfolio
- Set out the ways an equity manager can divide up the universe of investable shares
- Identify the sources of income and the costs that arise when holding and running an equity portfolio, and explain how each affects performance
- Explain what shareholder engagement can achieve and the part an equity manager may take in it
- Explain why an investor might choose each approach along the range from passive to highly active equity management