In the economic and financial environment, the benchmark is any index that is taken as a precedent to assess how efficiently a portfolio is managed. For example, we use the IBEX 35 index as a benchmark to compare the performance of an equity fund in Spain;
although the performance of a European equity fund would be measured against the Eurostoxx 50.
We will choose the benchmark depending on the market which is the target for the investor's investment strategy, profile and interests, and also the types of financial assets we can invest in. For some investment opportunities, we can also combine several indices if the investment is focused on several markets.
Advantages of a benchmark
Investment managers use a benchmark to define the investment purpose or goal, taking into account clear parameters such as: what markets and asset classes to invest in.
The investment funds' clients use the benchmark as a reference to get a proper idea of the target of the investment.
The benchmark is an easy way of identifying the risks of the investment.
It is easier to interpret returns when comparing against the benchmark.
Investors can use this system to compare and assess their current and historical performances.
Benchmark indicators: if there give positive performances, they can be used as good practices in the marketing strategy.