Benchmark portfolios are custom-tailored performance benchmarks that reflect the style of an investment manager. They allow for more meaningful evaluation of portfolio performance because they separate the results of investment style from those of investment decision-making. In addition, they can be combined with performance attribution analysis to examine the effects of market timing and sector, industry and security selection on the portfolio.
Some of the issues that need to be addressed in implementing a benchmark portfolio approach include the treatment of cash positions and transaction costs, the frequency of rebalancing, implementation and monitoring costs and the use of multiple benchmarks for a firm. The benchmark portfolio process is hampered by a lack of standards and by the varying investment horizons needed to assess different portfolio strategies. Despite these shortfalls, the process is beneficial.