Buzz: Value of cap-weighted index benchmarks debated

clock • 1 min read

Most respondents were unsure of the relative merits of using cap-weighted indices to measure fund managers' performance.

The rest were split 60/40 against using the measure after research suggested portfolios randomly selected by a monkey would outperform this benchmark.

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"If you want index performance that's fine but if you are looking for alpha you should choose a different index for comparison," explained one contributor.

Another respondent said members expected trustees to protect capital and grow the income and other attributes of their investments, and pointed out that mimicking markets was no way to do this.

"Don't let the fund managers wriggle out of a simple comparison based on investment results and costs," said one contributor. "Efficiency requires competition, and competition requires comparison. Anybody who doesn't accept benchmarking should not be marketing services."

But some contributors thought cap-weighted indices were suitable benchmarks for some assets, such as diversified growth funds. One asked whether the monkeys in question were FSA-regulated or had professional indemnity insurance.

Another supporter explained: "Cap-weighted is the generally accepted standard and readily available and widely understood."

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