The term Benchmark is an essential word in the world of investments and finance. Its importance lies in the fact that it functions as an indispensable reference to measure the performance of a portfolio or specific assets. If you have ever wondered how to know if your investments are performing well enough, the benchmark is the answer. In this article, we will explore in depth what it is, how it is used and why it is an essential tool for investors in Mexico.
1. What is Benchmark?
As mentioned above, it is an index or standard used to compare the performance of an investment. For example, if you invest in stocks listed on the Mexican Stock Exchange (BMV), the Prices and Quotations Index (IPC) will be your benchmark. This index measures the average performance of the main companies listed on the stock exchange, such as América Móvil, Grupo Bimbo and Cemex, to mention a few in our country.
The idea behind the benchmark is simple: compare to understand. If your portfolio has an 8% annual return and the CPI shows a 10% return, then your strategy may need to be adjusted, it’s as easy as that!
2. Why is it important?
This index is necessary because it acts as a financial thermometer. That is, it serves to determine whether your investment decisions are generating real value or not.
Reasons why Benchmark is crucial:
- Objective measurement: Gives you a clear benchmark of what you could earn with a passive strategy.
- Manager evaluation: If you delegate the management of your portfolio to an advisor, you can measure their performance against the benchmark.
- Decision making: Helps identify areas for improvement or possible changes in your investment strategy.
Types of Benchmarks
Financial standards fall into three main categories, each designed to meet different investor objectives and needs. Here we explain each type in detail:
a. Market Indexes
These are the most common and represent the overall performance of a market or market segment. They are ideal for comparing widely diversified portfolios. For example, if you have a portfolio composed of stocks of Mexican and foreign companies. If your portfolio’s return is 8% annually, but the IPC rose 10% in the same period, your strategy may need to be adjusted.
b. Custom Benchmarks
They are designed specifically for an individual portfolio, considering its unique asset composition, strategy and objectives. They are ideal for those seeking to measure the performance of more specific portfolios. For example, if a client is looking for a conservative portfolio with moderate exposure to international markets, the benchmark may reflect 70% Mexican fixed income and 30% global equities.
c. Sector Benchmarks
These evaluate the performance of specific economic sectors. They are useful for investors who wish to specialize in certain industries, such as technology, energy or real estate. If your portfolio is focused on a specific sector, such as real estate (FIBRAS) or sustainable companies, you can use a sector benchmark to evaluate their performance.
4. What makes a good Benchmark?
For an indicator to be useful, it must meet certain characteristics:
- Relevance: It should reflect the market or asset you are evaluating. For example, a fund that invests in technology companies may use the Nasdaq as a benchmark.
- Transparency: Its calculation and methodology must be clear.
- Consistency: It must be representative over time. For example, in Mexico, the IPC is considered a solid benchmark because it represents the 35 most important companies in the country, covering multiple sectors.
Indices in our country.
In the Mexican market, the most widely used benchmarks include:
TIIE (Interbank Equilibrium Interest Rate)
It is determined by Banco de México based on quotes submitted by credit institutions. For example, if the TIIE rises, it is likely that interest rates on personal loans, mortgages or credit cards will also increase, since banks will seek to cover this increase in costs when offering their products. In summary, the TIIE serves as a “benchmark” for many interest rates in the financial system and is a key indicator in the country’s economy.
S&P/BMV Index
This is an indicator used in Mexico to measure the performance of the shares of the most important companies listed on the Mexican Stock Exchange (BMV). This index is calculated according to the market capitalization value of the companies that comprise it. These companies are selected for their size, liquidity and economic relevance. It focuses on companies with the highest trading volume and those with the greatest impact on the national economy.
CPI (Price and Quotations Index)
It is a broader benchmark, since it includes the 35 most representative companies, but unlike the S&P/BMV, the IPC can have a wider selection of companies from different sectors, not necessarily the most liquid, but those that best represent the economy in general. If this fund returns 7% annually and the IPC shows a return of 9%, it means that you are not maximizing your returns.
6. How to use Benchmark to evaluate your portfolio?
Comparing your portfolio with an appropriate metric allows you to measure its performance objectively. Steps to use a benchmark:
- Identify the appropriate benchmark: For example, in the foreign exchange (Forex) market, the U.S. dollar against the Mexican peso (USD/MXN) is a relevant benchmark for evaluating currency investments.
- Calculate the yield of your portfolio: Include all associated costs, such as commissions.
- Compare results: If your portfolio is underperforming, evaluate strategic adjustments.
7. The importance of choosing the right index
A poorly chosen benchmark can lead to erroneous decisions. For example, if you have a globally diversified portfolio and use the CPI as a benchmark, you will be ignoring the performance of your international investments.
At Algo Global, we ensure that we select benchmarks that accurately reflect your objectives and portfolio composition.
8. Benchmark and volatility periods
In times of uncertainty or high volatility, this indicator becomes a critical tool to assess the impact of the market on your portfolio and adjust strategies. For example, during a financial crisis, a benchmark can help you identify whether your portfolio is holding up better or worse than the market average.
9. Risks of ignoring the Benchmark
Not considering a benchmark can lead you to:
- False security: Believing that you are getting good returns without an objective comparison.
- Underestimation of costs: The associated costs can reduce your actual gains versus the benchmark.
10. Benchmark and Something Global
At Algo Global, we use relevant benchmarks to evaluate each portfolio we manage. By comparing your results with specific indices, we can design customized strategies that bring you closer to your financial goals.
Benchmark as a strategic tool
This index is more than a number; it is a compass that guides you toward smarter financial decisions. Whether you invest in stocks, bonds, currencies or real estate, using benchmarks will allow you to evaluate your performance and adjust your strategy to achieve your financial goals.
With Algo Global, we not only identify the right benchmark for you, we design customized strategies.
