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I'm in my first year of reviewing my consolidated pensions and investments.

It looks like that over the last 3 years, the funds have underperformed against the MCSI index. I.e e.g each year underforms not the cumulative amount.

My question is, does that mean that I've got the wrong choice of funds.

This is more of a question about how useful these benchmarks are? I understand that it depends on the risk v reward but there must be a general rule.


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  • dunstonhdunstonh Forumite
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    It looks like that over the last 3 years, the funds have underperformed against the MCSI index. I.e e.g each year underforms not the cumulative amount.
    My question is, does that mean that I've got the wrong choice of funds.
    It depends on the objectives and risks of the funds you have selected.   Some funds, by design will have just below or thereabouts discrete performance but better cumulative performance.

    This is more of a question about how useful these benchmarks are? I understand that it depends on the risk v reward but there must be a general rule.
    Not all funds have the same risk level or objective as the benchmark.   So, performance may not be aligned.


    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • MarconMarcon Forumite
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    Fabtasia said:
    I'm in my first year of reviewing my consolidated pensions and investments.

    It looks like that over the last 3 years, the funds have underperformed against the MCSI index. I.e e.g each year underforms not the cumulative amount.

    My question is, does that mean that I've got the wrong choice of funds.

    This is more of a question about how useful these benchmarks are? I understand that it depends on the risk v reward but there must be a general rule.


    The 'general rule', to the extent there is one, is that benchmarks are only useful if the funds you hold are a true representation of what the benchmark measures; or you invest in a fund where the benchmark refers to 'outperforming the xxxx index by 0.5%' or whatever wording the fund manager uses to explain their benchmark. Is the MCSI the benchmark for the funds you hold, or simply the one you have chosen yourself (not as rare as it might sound!).
    Googling on your question might have been both quicker and easier, if you're only after simple facts rather than opinions!  
  • Secret2ndAccountSecret2ndAccount Forumite
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    There are many MSCI indices. Are you talking about MSCI World (that's developed world) or MSCI All - World (which adds in a bit of emerging markets), or one of the dozens of other MSCI benchmarks? Assuming it's MSCI World or All World, then they are, in my view, pretty good benchmarks. Pretty good because they are widely diversified: large and smaller companies from many different market sectors and countries. So a conservatively invested EQUITY portfolio (or fund) can fairly be measured against MSCI World. Notice I said EQUITY. If your investment is not made up of equities, then it's not a fair comparison. A popular fund around here is VLS60. That's 60% in equities, and 40% in bonds. The bonds (though it hasn't worked this year) are there to smooth over the bumps - to hold up when the inevitable stock market crashes happen. However, they typically stunt growth when markets are up. So it wouldn't be very fair to compare VLS60 against MSCI World. It would, in my opinion, be fair to compare VLS100 (100% equity) against MSCI World.
    HSBC offers an ETF (a fund) which tracks almost exactly MSCI World for an annual charge of 0.15%. So if your equity fund has trailed MSCI World by more than 0.15% in each of the last 3 years (that's good times and bad), then I would be taking a long, hard look at why you are owning it. Remember, that's only fair if it's an EQUITY fund.
    If you are young, or if you are able to take on high risk, it might well be a reasonable plan to have a large proportion of your retirement pot in equities. If you are closer to retirement, or could not face a day when your pot dropped 35%, then 100% equities is not for you. But then you shouldn't compare performance against MSCI World.
  • edited 25 November at 5:00AM
    MordkoMordko Forumite
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    edited 25 November at 5:00AM
    Yes, assuming you picked the right index, MCSI indices make a good benchmark for stock portfolios. Or FTSE. 

    What is your asset allocation? Home bias? Which funds do you hold? 
  • leosayerleosayer Forumite
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    Another point to consider is that MSCI indices are available in USD, GBP and other currencies.

    The currency of the index you use for comparison needs to be in line with the pricing currency and currency hedging strategy of your funds for the comparison to be meaningful. Impossible for anyone to give you an opinion on those funds vs the index without the name of the funds and the index.

    MSCI world (if that is the index you are using) is one of hundreds, maybe thousands of available indexes  created by MSCI and other providers eg. FTSE and S&P. They cover many different regions, countries, asset types, industries and many other factors eg. companies with 20+ year history of paying dividends.
  • FabtasiaFabtasia Forumite
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    Just wanted to say that this was all really useful. 

    What it allowed me to see was that I was comparing a mixed fund (e.g containing bonds), with an equity index, apples and pears..

    Unfortunately, I wasn't able to break the stock element out. However, this did lead to me talking to my IFA. They then did a comparison with ACT, which is a comparison on risk profiles e.g if some one wants medium risk, how each firms medium risk banded funds compared.

    I'm gradually educating myself and this info that everyone is sharing is much appreciated.
  • edited 29 November at 2:13PM
    MordkoMordko Forumite
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    edited 29 November at 2:13PM
    It’s very easy to compare against an appropriate blend of indices.  For example you could use MCSI all country world with 60% weighting and Barclays Global Ag Bond index with 40% weighting to compare against a globally diversified 60/40 portfolio.

    Anyone investing in inactive funds should have an appropriate benchmark or a mix to compare against so you are on the right path.  

    Comparing against active funds is less meaningful. On average such funds underperform, so you are comparing against a handicapped benchmark.

    Breaking out the stock element is dead easy. Information is readily available on Morningstar and other platforms. 
  • dunstonhdunstonh Forumite
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    Unfortunately, I wasn't able to break the stock element out. However, this did lead to me talking to my IFA. They then did a comparison with ACT, which is a comparison on risk profiles e.g if some one wants medium risk, how each firms medium risk banded funds compared.
    Most IFAs have software called Financial Express Analytics.   There is an option in there to benchmark your portfolio against the averages of your underlying assets.    That is probably one of the most accurate you can get.   

    The problem with generic benchmarks is that you could have 50% equity and 50% bonds but your bonds could be US currency hedged.  Or not currency hedged or gilts, or index linked gilts or corporate bonds.  Your equities could have a tech bias or not. and so on.      A portfolio with a tech bias would have outperformed many benchmarks in 2020 and 2021 but underperformed in 2022 as tech went off the boil.

    You will probably find in time that ignoring benchmarks is the best way and maybe just get as close to the efficient frontier as possible and what will be will be.

    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • MordkoMordko Forumite
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    The problem with picking benchmarks which are hedged, have the same home country bias, sector split, etc is that you are making benchmarks fit your exact portfolio. If you do it well you’ll get the exact same answer. 
  • LintonLinton Forumite
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    Mordko said:
    The problem with picking benchmarks which are hedged, have the same home country bias, sector split, etc is that you are making benchmarks fit your exact portfolio. If you do it well you’ll get the exact same answer. 
    That is the danger with benchmarks.  All that a difference from the bencmark tells you directly is that the portfolio has different underlying investments which you probably knew anyway.

    Useful knowledge comes from understanding why your portfolio performs differently to the benchmark.  Underperforming a benchmark does not mean your portfolio is sub-optimal in some way and outperforming doesnt mean it it superior. Either could be a function of level of risk.  For that reason a benchmark should be close to your portfolio in regards to the aspects you dont care about so that the effect of the differences you do care about are not hidden.
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