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Market Benchmarks: Measuring Portfolio Performance

The Dow Jones Industrial Average reached the 20,000 level for the first time in history on January 25, 2017. This event along with the beginning of the New Year provides a good opportunity to review market benchmarks and indices, how they are constructed and how they may be used in performance reporting.

When measuring portfolio performance over a given period of time it is standard industry practice to compare the portfolio return to the performance of a relevant index or a blended collection of benchmarks. This is what is often termed “relative performance”.

There are many benchmarks and varying portfolio asset allocations based on an investor’s time horizon and risk tolerance. In an effort to provide a helpful and consistent benchmark for clients we have been calculating and utilizing the following single blended benchmark:

  • TSX Composite Total Return Index: 40%
  • S&P 500 Total Return Index (C$ adjusted): 25%
  • FTSE Canada Overall Bond Universe: 35%

This blended benchmark can be easily calculated and provided for any timeframe and compared to a client portfolio. Most clients have balanced portfolios but the weightings may be adjusted to provide a closer match to any asset allocation when required.          

 

Index Benchmarks Defined

 

The Dow Jones Industrial Average (DJIA) that has been recently celebrated is an important index due to its history and media coverage. It was established in 1896 but the components of the index have changed many times over the years and only General Electric remains from the original list.  The consistent changes along with an esoteric weighting methodology make it not an ideal choice as a benchmark. 

Most market indices are constructed and weighted depending on the market capitalization or value of a company’s equity. The larger the market value of a company, the greater percentage of that index the company will be allocated. The DJIA is weighted differently; it is an index of only 30 stocks and the weighting is price based. A company with a share price of $200.00 will have a much larger effect on the index than a company with a share price of $50.00 regardless of the capitalization of the company.

The S&P 500 is more widely used as a benchmark for portfolio management and performance reporting.  The S&P 500 Total Return Index includes 500 of the largest companies in the U.S. including dividends paid. The benchmark is capitalization weighted and may be adjusted for C$ currency.

The TSX Composite Total Return Index includes the return of the Toronto Stock Exchange Composite including dividends paid.

The FTSE Canada Overall Bond Universe includes a measurement of the performance of a wide duration of bonds including coupon payments.    

The use of these three indices combined should give clients a clear barometer to compare their portfolio performance in all market environments.  

 

The Top Weightings of the TSX Composite

  1. Royal Bank
  2. TD Bank
  3. Bank of Nova Scotia
  4. Suncor
  5. Bank of Montreal
  6. Enbridge
  7. TransCanada
  8. BCE
  9. Manulife
  10. CN Rail

 

The Top Weightings of the S&P 500

  1. Apple
  2. Microsoft
  3. Exxon Mobil
  4. Amazon
  5. Berkshire Hathaway
  6. Facebook
  7. JP Morgan
  8. Johnson and Johnson
  9. General Electric
  10. Wells Fargo

 

This publication is solely the work of Jon Batchelor for the private information of his clients. Although the author is a Manulife Wealth Inc. Advisor, he is not a financial analyst at Manulife Wealth Inc. and Manulife Wealth Insurance Services Inc. This is not an official publication of Manulife Wealth Inc.. The views, opinions and recommendations are those of the author alone and they may not necessarily be those of Manulife Wealth Inc.. This publication is not an offer to sell or a solicitation of an offer to buy any securities. This publication is not meant to provide legal, accounting or account advice. As each situation is different, you should seek advice based on your specific circumstances. Please call to arrange for an appointment. The information contained herein was obtained from sources believed to be reliable; however, no representation or warranty, express or implied, is made by the writer, Manulife Wealth Inc. or any other person as to its accuracy, completeness or correctness.