Although performance benchmarks are hardly a new concept, they have only been part of mainstream thinking for a relatively short period of time. It was in the 90's that investment companies first came under major pressure to demonstrate that they were 'adding value' and yardsticks like the MSCI World Index and the JP Morgan Global Bond Index became part of every day parlance.

Over time, it has become increasingly clear that benchmarks have had negative as well as positive consequences. On the plus side, they have increased transparency in the investment world and helped investors to sort the wheat from the chaff. On the negative side, they have spawned homogeneity in the industry, with few investment firms willing to think independently or to stand out from the crowd. It is a sad and simple fact that many investments today are held in portfolios simply because of their inclusion in an index rather than as a result of cold, hard analysis.

Reference Points

Ashburton espouses a flexible approach to performance assessment. Whilst we understand that it is important for us to demonstrate that we are doing a good job, we also want to maintain a sufficiently free hand on investment strategy so that we can invest in what makes sense rather than what is in an index. The conventional approach is to employ one particular benchmark to assess a portfolio's performance. In preference, we recommend the use of three reference points that, when taken together, reflect the true spirit of our various investment services:

1. Cash

Most investors have an investment portfolio in the hope that they will achieve a better return than they would have got with cash in the bank. For these purposes, cash is defined as being the performance of the average offshore money market fund.

2. Composite Index

One of the reference points must take into account prevailing market conditions and portfolio investment restrictions. The Asset Management Service can invest a maximum of 50% in equities, a maximum of 50% out of base currency and a maximum of 70% in bonds and therefore its composite index is: 37.5% MSCI World Index, 37.5% JP Morgan Global and 25% cash deposit. The Cash & Fixed Income Service can invest a maximum of 100% in bonds and a maximum of 50% out of base currency and therefore its composite index is: 50% JP Morgan Global Bond Index and 50% cash deposit.

3. Risk-adjusted Performance

The positive relationship between risk and reward is widely documented and understood. We want to be able to demonstrate to our investors that they have achieved an attractive rate of return relative to the risks to which they have been exposed.

The most widely used measure of risk is volatility. Otherwise known as the standard deviation of investment returns, this calculation measures the degree to which the value of a portfolio oscillates around its central trend. Our favoured method of incorporating risk into the performance assessment process is to calculate a fund's sector ranking by absolute performance and also by risk (with the lowest volatility accorded the highest rank) and then taking the average of the two. By this measure, we would like to see our funds in the top half of their respective peer groups and ideally in the top quartile.

The Cash & Fixed Income Funds reside in the international bond fund sector and the Asset Management Funds in the international managed fund sector.

Using the reference points

Economic, political and financial themes often take months or even years to develop. This is why investment should be viewed as being a long-term commitment. The introduction of benchmarking has seemingly led to some shortening in time horizons, with many investors impatient for results now. This impatience has resulted in the investment industry becoming increasingly short-term in its outlook.

We recommend a long-term approach to performance assessment, which ensures that the investor is able to properly assess the worth of their investment manager and the investment manager is able to manage the portfolio in a prudent fashion. We view a three-year time horizon as being optimal in this regard. A longer time period also allows for the generation of meaningful risk statistics (as explained above, risk is an integral part of the assessment process).

In an ideal world we would like to succeed on all three fronts: beating cash, beating the composite index and outperforming on a risk-adjusted basis. We would certainly be disappointed if we failed to perform on at least two out of three criterion.