Benchmark vs. category

aroominyork

Could someone please explain the difference between benchmarks and categories, against both of which funds are often charted, and the merits/demerits of comparing a fund against each? I think the benchmark is the nearest equivalent index and the category is something to do with other funds in the sector, but after that I get a bit hazy. Thanks.

MarkCarnage

Your summary is not far off. However, a benchmark needn't be a market index. Some funds/trusts benchmark against RPI (usually +x%). Some have composite benchmarks - e.g. 50% UK/50% global etc.

aroominyork

So for category does it take all the funds in the sector - similar to the list if you search on Trustnet, eg 323 global funds - and average them?

MaxiRobriguez

Does anyone actively use benchmarking comparisons when considering what funds to buy?

If I'm buying an index tracker there should be minimal difference. If I'm buying an active fund, I want to know what's under the hood rather than how it's performed against others. Past performance doesn't equate to future gains and all...

Prism

MaxiRobriguez wrote: »

Does anyone actively use benchmarking comparisons when considering what funds to buy?

If I'm buying an index tracker there should be minimal difference. If I'm buying an active fund, I want to know what's under the hood rather than how it's performed against others. Past performance doesn't equate to future gains and all...

I do as a start. I might compare the funds previous performance at set times vs other funds e.g. last September to December. Gives a feel on how a fund might cope with downturns etc, although each downturn is different.

aroominyork

They are useful in deciding whether to buy an index or active fund. Take North America, for example, often said to be so deeply researched that prices reflect values and active fund management adds little value. Looking at funds against benchmarks helps assess whether this holds true and whether to buy an active fund or an S&P index.

MaxiRobriguez

aroominyork wrote: »

They are useful in deciding whether to buy an index or active fund. Take North America, for example, often said to be so deeply researched that prices reflect values and active fund management adds little value. Looking at funds against benchmarks helps assess whether this holds true and whether to buy an active fund or an S&P index.

Surely the decision on whether to buy an active fund or index is determined by the investors strategy, which comes before looking at the benchmark?

For example, you wouldn't (or shouldn't!) have an investor who is planning to buy an index fund because they want a cheap, passive option to provide acceptable gains because they don't believe an active manager can outperform consistently, then go on Trustnet and compare an active fund against some index tracker options, to pick an active fund because for two or three years the fund has outperformed the indexes.

Deciding to buy index or active based on benchmark performance is precisely basing investment decisions on past performance.