This article outlines how to compare your investment returns to an appropriate index, so as to check whether you are getting the returns you “deserve” (based on your risk profile).
Target Audience
Singapore-based investors with lump sum investments with a 3+ year history, whether:
1. a pension-related investment (e.g. under a QROPS or SIPP arrangement), or
2. a standalone (non-pension) investment.
Where are we? And how did we get here?
If you transferred your pension(s) into a QROPS (Qualifying Recognised Overseas Pension Scheme) or into a SIPP (Self-Invested Personal Pension) a number of years ago, one of the motivations may have been so as to have flexibility around how the cash is invested.
Equally, if you had excess cash earning little-to-no interest in a bank account, you may have chosen to invest it in the hope of receiving a better return than the interest rate your bank was offering (if any) on the deposit.
If you arranged such an investment via a financial adviser here in Singapore, they will have asked you a series of questions so as to ascertain the “risk profile” appropriate to you. From this exercise, your financial adviser will have determined your attitude to risk, and identified your profile as belonging to one of the following categories:
- Conservative
- Income
- Balanced
- Growth
After determining this, your financial adviser will have proposed a corresponding portfolio (with appropriate percentages of various asset classes), and your investment journey will have started.
Since then, you will hopefully have received periodic portfolio statements from your financial adviser, and attended a regular (generally 6-monthly) face-to-face meeting to go through the performance of your investments and to agree whether to make any amendments e.g. due to significant changes in macroeconomic circumstances and/or updates in your own situation.
All good so far, but I’m guessing that in spite of all of this good process, the following nagging question may well have persisted, in the back of your mind:
“Yes, my portfolio is up X%, but is X% what I should expect, or should it be more, or less?“.
So, what to compare to? Indices to the rescue!
A percentage return figure in isolation is of little value. What we need is a “relative return” figure, which clearly depends on having something to compare to!
The good news is that there is a series of indices maintained by PIMFA (the Personal Investment management & Financial Advice Association), with one for each of the risk profile categories mentioned above.
These indices (described at this link) are based on PIMFA’s view of the appropriate proportions of asset classes (equities, bonds, cash, real estate, alternatives) that should comprise each risk-profile-based portfolio with, for example:
- the most adventurous “Growth” category having the highest proportion of the most risky asset class (equities), and
- the least adventurous “Conservative” category having the smallest proportion.
From PIMFA’s records of the performance of each asset class over time, a composite index is created and tracked for each risk profile, as described at this link.
What this all means is that we can assess how well your “Conservative”, “Income”, “Balanced” or “Growth” GBP portfolio has performed vs. its relevant industry-standard index.
Under-performance may indicate poor choice of “Active” funds (which have therefore underperformed their passive, index-tracking counterparts) and/or incorrect asset class allocation (e.g. too high a proportion of low risk asset classes for a “Growth” risk profile).
Equally, over-performance may not be worth celebrating, if due to excessive risk having been taken vs. your risk profile (e.g. a 100% allocation to equities for a “Balanced” risk profile).
Conclusion
Finding out how your portfolio has performed vs. an industry-standard index relevant for your risk profile is a great first step in assessing whether you are getting the returns you “deserve”.
What should then follow is a deep-dive into the funds themselves to confirm whether these are appropriate for you, and whether they are performing the way they should be vs. their own benchmarks.
As I have performed this analysis now for several prospective clients, I am very happy to offer this complimentary service to anyone with a lump sum portfolio who is wondering how it “should” have performed over recent years.
The output of my analysis for you will include an assessment of performance vs. the appropriate benchmark for your risk profile, and an in-depth look at the funds in which you are invested, driven by the comprehensive portfolio analysis tools available to me.
All I need from you as input to the process is:
- a recent portfolio statement,
- your risk profile from the time the portfolio was set up (e.g. “Balanced”), and
- your interest in finding out where you stand.
If you are a “Balanced” investor getting less than “Cautious” returns, then the sooner you find out, the better!
Michael Davidson is a Singapore-trained and qualified Financial Adviser with Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to international and local professionals in Singapore.
Book a complimentary consultation here. Please quote reference “917UK”.
Global Financial Consultants Pte Ltd – Reg. No: 200305462G | MAS License No: FA100035-3
*Please note that Michael Davidson is not a tax specialist or accountant and that none of the content outlined here should be taken as personal advice. You should consult your tax specialist and financial adviser to review your current financial situation and futures goals to consider whether this strategy is appropriate for you. I expressly disclaim all and any liability to any person or organisation, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether whole or in part, upon the whole or any part of the contents of this article.
