Q.On our last quarterly reports, the benchmarks didn’t seem right.  Our portfolios should have performed very close to the benchmarks but sometimes they were either much higher or much lower.  How do we  figure out what is going wrong?

A.In PortfolioCenter Benchmarks (aka Targets) are a mix of index returns that reflect your portfolio’s asset allocation.  While they can be set up quickly, they do require regular maintenance to be meaningful.

Here are the things to check.

  • Make sure the right benchmark is assigned to the right portfolio.  You may have inadvertently assigned the default choice when the portfolio was created and never updated it to the actual target.
  • Make sure the weighting of the target still reflects the asset mix of the portfolio.   When you rebalance your portfolios, rebalance your targets to reflect the same changes or they will drift apart over time.
  • Make sure the index figures in the benchmarks actually reflect your asset mix.  If you’re using an index that tilts large cap while you tilt small cap (or vice versa), you’ll be comparing apples and oranges.
  • Make your securities are classified properly.  It’s easy to accept the default asset class settings only to find you have an international equity coded as domestic or a fixed income coded as an equity.  Best practices are to check this classification settings as new securities are defined.  But it’s also a good regularly review the Master List of Securities and the Securities Data Manager to check for and correct problems.
  • Make sure you have accurate index data.  Sometimes index data is updated after the fact.  If you use a service to import index returns,  update from the year-to-date (rather than the latest month) to make sure you receive any historical corrections.
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Photo taken by Larry Johnson and used here under Flickr Creative Commons.