What is your benchmark?

I ask because I have always measured my portfolio against the FTSE 100. It is the main UK index, and in the past I have said I would instead invest in this index were I to become a passive investor.

In fact, all the new money I invested went into the FTSE during my stint as a share-tipster some years ago.

But the FTSE has been a woeful performer over the last two decades. I just wonder if its main constituents – Unilever, Shell, HSBC, Glaxo, BAT etc – have seen their best days and are becoming market dinosaurs.

I would no longer invest purely in the FTSE 100 today. So I have been thinking about a new benchmark.

I don’t believe in the conventional view of benchmarks – that is, measure yourself against a particular style/sector index that broadly reflects your own portfolio.

For instance, many people have asked me why I do not measure my portfolio against a small-cap index or an AIM index because my shares are mostly small or mostly on AIM.

The answer is simple – I would not invest entirely in a small-cap/AIM index and leave it there untouched for the long term. I don’t think anybody would.

In contrast, I see benchmarks as alternative investments that I could leave untouched for the long term – a passive alternative that would tell me whether my stock-picking has been really worth it (or not).

Rather than plump for one investment, I have created a benchmark blend through four funds that involved minimal thought and research:

  1. Fundsmith – exposure to quality global large-caps
  2. Nasdaq 100 – exposure to leading US techs
  3. Free Spirit – exposure to UK small-caps
  4. FTSE 100 – exposure to market dinosaurs

I suppose Fundsmith is an automatic choice these days for hands-off investors. I do like US tech for the long run and the Nasdaq seems the best way to ride that.

I considered the Buffettology fund as I like the way Keith Ashworth-Lord invests Should I (or You) Buy The Buffettology IT?, but plumped for Sanford’s much smaller sibling Free Spirit as i) K A-L is a co-manager, ii) its smaller size gives more scope to bet big on the ‘next Games Workshop’ and iii) it has out-performed Buffettology in its four-year lifespan.

I could not face excluding the FTSE completely, so included it as a value/high-yield/contrarian play. A benchmark comprising only of past winners might be asking for trouble.

Here are the five-year performances, starting prices as of the end of 2020, and the price change since:

I will monitor this benchmark’s returns and report back every so often. There will be no changes for the next five years. The performance could create very uncomfortable comparisons with my portfolio. Whether I then give up stock-picking – or put my head in the sand while still hoping to unearth a ten-bagger – is hard to say!

So… what is your portfolio benchmark? I would be interested to know what – if anything – you measure your returns/stock-picking against. And could you beat this four-fund benchmark? I am not sure I will.

Maynard

I assumed it was the MSCI World £ reinvested (but apparently it is the FTSE equivalent, which I found easier to locate on Shareshcope 9 years ago!), for exactly the reason set out in your email: if I was going to choose one passive investment that would be it. The FTSE 100 was too dominated by a few large financials and energy stocks. I also check performance against the FTSE All-share, but this still has the same issues as the 100.

I also fear my core (Vanguard LS60) plus satellite (fund managers with a clear style/concetrated portfolios and thematic investments) will outperform my direct stock picking (initial EV sub £150m, growth with decent ROCE etc…). I will give it another five or so years that will allow a 10 year comparison.

Hi Mike

Yes, the MSCI World is probably the benchmark for all benchmarks!

Had a quick look: https://www.msci.com/documents/10199/f0e54c85-98b7-40eb-9a7b-bbb03288b523

Top 14% is represented by six large US tech stocks, and almost 50% is represented by IT, healthcare and financials. So there is a bias, but not as pronounced as the FTSE’s back in the day.

Relevant tickers for MSCI World Acc ETFs are CW8G, HMWO, MXWS, SWDA and SWLD. Might be more. Not easy to find in SharePad!

Maynard

I’m currently using the FTSE All Share as my benchmark. Initially my reasoning was that the FTSE All Share represented the pool of stocks from which I would select a subset for my portfolio. FTSE All Share stocks currently comprise the largest group of investments in my portfolio but they are not the majority, so that reasoning doesn’t really hold up any more.

If I were to select a small set of core ‘hands-off’ funds to benchmark against I’d probably be inclined to avoid individual markets and use funds that can all invest globally. I agree that Fundsmith is a good place to start and I would add Smithson [SSON] to that to get exposure to quality mid-caps. Scottish Mortgage [SMT] for pure global growth and then Monks [MNKS] for more stable balanced growth.

So there’s an alternative four funds that I think would give strong results if left untouched. In reality if I decided to be completely hands-off I wouldn’t limit my holdings to just 4 funds. Particular concerns of the four I mentioned is that they are all actively managed and split over only two providers - Terry Smith and Baillie Gifford.

I have thought more about this. The benchmark for a totally hands-off, no-thought investor is this MCSI World index – which simply tracks that world’s largest c1,600 companies. This seems a better passive option that just restricting oneself to the FTSE.

Good alternatives. I suppose if my chosen funds beat my stock-picks, then maybe my share selection is not poor, just my fund selection is better. Anyway, let’s see what happens. I will track my portfolio against the MSCI World and my foursome (as well as the FTSE 100) and report back at the end of each year.

Maynard