1. Index-linked benchmarks

   Funds with index-linked benchmarks measure their performance against a certain index.

   An index is a portfolio of securities representing a particular market or a portion of it. The FTSE/JSE All Share Index, the All Bond Total Return Index and MSCI World Index are good examples of commonly used indices in South Africa.

   Index-linked benchmarks are mostly used for funds that only buy one type of asset class, (e.g. equities) so it is easy to see what the index-linked fund invests in.

2. Composite benchmarks

   As the name suggests, composite benchmarks are created by combining at least two indices with different weightings to form a new composite index.

   This type of benchmark allows fund managers to invest in more than one asset class. For example, a Balanced Fund manager may invest in equities, cash, bonds, property and foreign assets.

   The composite benchmark gives investors a good idea of how the portfolio will be structured as fund managers normally align the asset allocation with that of the benchmark.

3. Inflation-linked benchmarks

   A common mistake many investors make is measuring their returns in nominal, as opposed to real, terms. Real returns are returns above that of inflation (i.e. real returns = nominal - inflation). While some older investors long for the mid 1980s when they could get 18 percent in a money market fund, they have forgotten that inflation was also as high as 20 percent during the same period! In fact, money markets outperformed inflation by only one percent on average during the 80s.

   Funds with inflation-linked benchmarks aim to generate returns in excess of inflation, thus growing investors? wealth in real terms. These funds normally utilise all the asset classes at their disposal.

   Investors therefore need to remember the golden rule of investing when buying inflation-linked funds: the higher the return, the higher the risk, or rather, the higher above inflation the benchmark, the higher the risk of the fund.

4. Peer group benchmarks

   Currently there are more than 700 unit trust funds in South Africa. All of these funds are categorised by ASISA according to their mandates and investment objectives. This makes it easier for investors to identify funds in a specific asset class or sector.

   For instance, all the property funds in South Africa fall into the Domestic Real Estate Index. Many investors who find the task of selecting a fund from a list of funds available in a category daunting make use of funds with peer group benchmarks. These funds aim to outperform the average of the funds in this sector.

So, when deciding whether your unit trust company is worth the fees they are charging you, remember to take benchmarks and time into consideration before making that call.

PPS Investments

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