|
Clear Thoughts
What is in a Benchmark?
| Understanding definitions reveals differentiation. |
A benchmark is defined as a standard by which something can be measured or judged. Money management firms rely on benchmarks to measure their performance versus a standard that is widely understood by investors.
Clear Asset Management has created its own measure of performance, called the Clear Composite, which combines the performance of each of our six portfolios, equally weighted, into a single number. This is a significant measure, as many investors have placed their assets over the six portfolios seeking to gain broad market exposure.
The Standard and Poor's 500 (S&P 500) is the index we use most as a benchmark. The S&P 500 measures the aggregate performance of the 500 largest publicly-traded U.S. based companies, as ranked by market capitalization. The S&P web site contains a complete definition. Basically, when most investors see an S&P 500 index fund, one typically assumes that it is comprised of all 500 stocks, or a close subset, aimed at replicating the return of the index. An S&P 500 fund should, in theory, just slightly under-perform the index due to trading, custody, marketing and management fees.
With that as background, let us consider two more questions:
First, why are there so many benchmarks?
The answer is that there are a practically infinite number of permutations with which one could logically group and sort stocks. For example there are sector indexes such as energy or financials, and there are style indexes such as growth and value. One can also group stocks by size such as small or large capitalization. For more precision one can combine such criteria to target whatever universe of companies investors find relevant.
Second, why does Clear compare itself against the S&P 500 and then on its performance page add in seven more benchmarks?
The S&P 500 is the most widely recognized index, so it makes sense for many investors to compare the Clear portfolios and the Clear composite to this popular index. Clear has precisely defined its portfolio strategies as:
| Large Cap Growth |
Growth stocks with a market cap over $8 billion |
| Mid Cap Growth |
Growth stocks with a market cap $1 to $8 billion |
| Small Cap Growth |
Growth stocks with a market cap $300 million to $1 billion |
| Large Cap Value |
Value stocks with a market cap over $8 billion |
| Mid Cap Value |
Value stocks with a market cap $1 to $8 billion |
| Small Cap Value |
Value stocks with a market cap $300 million to $1 billion |
Each Clear portfolio is compared to an institutional benchmark that closely mirrors its style, market cap and definition. These benchmarks are considered institutional because they are most frequently used by institutions. Although widely available, they are not broadly used by individual investors. These are the S&P Growth and Value style indexes.
In addition to the six individual style indices, we compare the Clear Composite to the S&P 1500 index, which includes the next 1,000 stocks after the 500 largest, thus representing the broader market, and therefore most relevant to our composite.
Many of our investors just seek positive results; some want us to beat their specific benchmarks, which may include investments outside of stocks, and each investor has a different time horizon for measurement. Therefore, for individuals, the right benchmark will differ.
At Clear Asset Management, we calculate risk adjusted returns, volatility and performance. We then compare ourselves to the institutional benchmarks, and all U.S.-based separate account managers. We are about to announce receiving additional recognition for the returns we delivered in 2005 from an institutional performance measurement firm. That is great news, but as our investors, you should know that our most important and treasured measurement of our performance is the confidence shown by our clients who trust us to advise their separate accounts and our customers who purchase subscriptions to invest and trade our portfolios.
Enjoy the celebration of past presidents this weekend as we celebrate democracy and great leadership, and remember Monday is a market holiday. Customer service will reopen at 8am Eastern time, Tuesday morning.
PS To listen to our Bloomberg radio interview (from Tuesday) discussing the Retail Sector; click here.
|
|
|
|
 |
|
