If you received a 49 on a final exam, you’d be depressed. But if you discovered the average score was 12 and the highest score was 51, you’d be thrilled.

Similarly performance returns in PortfolioCenter do not always tell the whole story.  Sometimes clients need to know that a -3.0% return is fantastic because the market is down -10%.  Using market indexes and/or Targets in PortfolioCenter can explain why a performance return that looks average is actually great.

A market index, such as the S&P 500 Composite Total Return or the Barclays Capital Intermediate Aggregate Bond, can easily be added to many performance reports.  But comparing one or two indexes to a diversified portfolio may not clarify anything.  If the portfolio contains a mix of domestic and international equities, fixed income and real estate, it makes more sense to create a blend of several market indexes that reflect the portfolio’s investment policy.

PortfolioCenter calls this blended index a Target.  You create Targets using weights, market indexes and your Asset Classes. Once created, you assign a Target to your portfolios or groups.  Then choose which reports you’d like to show the Target return.

Before creating your Targets in PortfolioCenter, here are a few things to consider:

  • How many targets for how many clients? – Do you have the same investment policy for several clients, or is each portfolio a custom mix? Similarly, do you want to show Target comparisons for all clients or a chosen few? Fewer Targets are easier to manage.  Lots of individualized Targets can be maintained if you’re organized, but you should factor in extra time for maintenance & review. I’ve found 10 or less Targets is manageable and mistakes began to proliferate once you pass 25.
  • Which indexes?   –  Are there appropriate indexes for your investment policy mix and is the data for them available?  Since the target is a blend of indexes, you must have complete returns for each index used to produce a blended return.  Make sure you pick indexes with data that is easily obtained and goes as far back as your portfolios. You can subscribe to a service that allows you to import index data into PortfolioCenter or you can manually enter such data.  Also, using market indexes will delay your report production as the data is not available until several days after the end of each month.
  • Do you have clear and meaningful Asset Classes?  – While PortfolioCenter offers three levels of security categories (Asset Class, Sector, Subsectors), Targets can only be based on Asset Classes.  All three categories are completely user defined:  you define the names, create as many of each as you prefer and assign them to whatever securities you choose.  If your Asset Classes reflect a patchwork of  several different systems you’ve tried over the years, you should streamline them before setting up Targets, remembering that PortfolioCenter uses Asset Classes for more than Targets.  I’ve found having no more than 9 Asset Classes which reflect your TOP level allocation gives you the most flexibility to use all possible features of PortfolioCenter (including Targets) and produces the clearest reports.
  • Do you have time to update your targets?  –  While Targets are easy to use, they require regular maintenance.  Changes in the investment policy ought to be reflected in the Target. If you change the portfolio to 40% equities/60% fixed income but the Target remains 60% equities/40% fixed income, comparing the two returns may cause confusion at client meetings.  You should rebalance your target whenever you rebalance your investment policy.

One final thought, I’ve seen managers set up a precise system of Targets only to find their performance returns look poor in comparison.  Word to the wise,  use the indexes you want to beat in your Targets — so the expense ratios don’t make it appear that you consistently under perform.

 Need help thinking this through?