Wealth guide
Benchmarks for family wealth
Updated: · Leutrim Miftaraj, FLIORE · Editorial standards · Other languages: Deutsch · Français · Español
Short answer
A benchmark is the yardstick against which performance is measured. For family wealth, a benchmark composed of market indices that reflects the strategic asset allocation is usually suitable, supplemented by an absolute target such as "inflation plus three per cent". What matters is that the benchmark is set in advance, is investable and is calculated in the reporting currency.
What a benchmark is for
Without a yardstick, any return is hard to judge. A five per cent return is weak in a year of strongly rising markets and excellent in a crisis year. A benchmark separates the performance of the markets from the performance of the asset management and shows whether the chosen strategy meets the family's goals.
Types of benchmark
| Type | Example | Strength | Weakness |
|---|---|---|---|
| Composite index | 50 % global equities, 40 % bonds, 10 % cash | Measures implementation of the strategy | Represents private market investments poorly |
| Absolute target | Inflation plus 3 % a year | Linked to preserving the family's purchasing power | Fluctuates strongly in the short term |
| Peer group | Comparable mandates | Shows relative position | Composition often unclear |
| Single index per mandate | Index for an equity mandate | Fair for specialised managers | No picture of the total wealth |
Setting a benchmark
- Set the strategic asset allocation in the investment policy statement.
- Choose a suitable, investable index for each asset class.
- Determine the weights according to the strategy and record the rebalancing rule.
- Calculate the benchmark in the reporting currency, hedged or unhedged in the same way as the portfolio.
- In addition, define an absolute target for the family.
Measuring fairly
An asset manager should only be measured against what they can influence. Whoever runs a global equity mandate is measured against a global equity index – not against the family's total return. The composite benchmark applies to the total wealth. Returns are calculated on a time-weighted basis (TWR) for this purpose, because the family's inflows and outflows are not attributable to the manager.
Private market investments and direct participations are hard to compare with public indices. Here, comparisons with funds of the same vintage or an absolute target are more meaningful.
In FLIORE
FLIORE calculates the time-weighted return (TWR), internal rate of return (IRR) and MOIC per mandate in the chosen reporting currency. The monthly report shows performance and allocation and thus provides the data basis for the comparison with the agreed benchmark.
At a glance
| Standard for total wealth | Composite benchmark in line with the strategic allocation |
|---|---|
| Supplement | Absolute target, e.g. inflation plus x per cent |
| Return method | Time-weighted (TWR) for comparison with indices |
Terms on this page
- Time-weighted return
- A return measure that neutralises the effect of contributions and withdrawals and thus measures the performance of the asset management.
- Internal rate of return
- Money-weighted return that takes into account the size and timing of all cash flows – common for private equity and real estate.
Frequently asked questions
Which inflation index applies?
The index of the country where the family incurs its expenses: in Switzerland the national consumer price index of the Federal Statistical Office, in the euro area Eurostat's harmonised index of consumer prices.
May the benchmark be changed afterwards?
Only with reasons, for example if the strategy changes, and not retroactively. Adjusting the benchmark after poor results devalues the comparison.
How is a benchmark chosen for real estate?
For directly held real estate, real estate indices are only of limited use. An absolute return target or a comparison with regional market data is often used.
How often is performance measured against the benchmark?
Monthly or quarterly in the reporting, but judged over several years. Short-term deviations say little about the quality of the strategy.
Should the benchmark take costs into account?
Indices contain no costs; portfolios do. A fair approach compares the net return with the index, supplemented by a cost overview. This shows whether a deviation stems from the investment decision or from costs.
Sources
- Global Investment Performance Standards (GIPS) – CFA Institute
- CFA Institute – standards and research
- Swiss Federal Statistical Office – national consumer price index
- Eurostat – harmonised index of consumer prices
This page provides orientation and does not replace legal or tax advice. The cited legal sources in their applicable version are authoritative.
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