In essence, benchmarks are a standard against which the performance of financial instruments like managed funds can be measured. More often than not, broad market and market-segment indices are used for benchmarking purposes. A benchmark is usually an index of securities from the same, or similar, class: stocks are usually compared against stocks, bonds against bonds and so on.
Why benchmarks can be a useful tool for investors
When an investors is looking at the performance of an investment, it helps to be able to compare it to something else to give a sense of how well or how badly the performance of the investment compares. Market indices can be useful for managed fund investors by offering market ‘standards’ to help them evaluate the risk and the return history of their own investments.
In the Australian financial landscape, there are many indices that analysts and fund managers use to gauge performance. In the interest rate securities area these include the Bloomberg (formerly UBS) Bank Bill Index and the Bloomberg Composite Bond Index. International bond funds will naturally use a different set of benchmarks to domestic funds.