Benchmarking investment performance: What it really means
The use of benchmarks is essential for measuring performance in various fields, including sports and investments. In the investment industry, benchmarks help investors evaluate the performance of their fund managers. However, there are practical limitations in comparing active funds to their benchmarks, such as investment limits and transaction costs. Benchmarks are not readily available for all types of funds, so asset management companies often choose or create a benchmark that fits their fund's description.
A yardstick is essential for measuring any performance, and to gauge whether it is good or bad. For instance, an athlete aspiring to compete in the Olympics has to clear the qualifiers, prior to the final event. In the final event, the performances of that day become the benchmark. Even with reference to that benchmark, rating the performance as good or otherwise is a matter of perspective.