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Family Office Investments -Benchmarking

Family Office Benchmarking

If ever there was an illustration on how unique each family office is, it’s in the way they benchmark their portfolios.

It also highlights the challenges for those that manage assets for these family offices – how do you manage to a benchmark that may have no place is measuring your effectiveness? It also shows why there is no point in having a “family office index.”

And I think that’s the crux of the argument for benchmarks – how relevant are they to the asset owners (have we hired the right people/do we have the skill set) as investment staff (are we being recognised for our good work).

I put together this piece to reflect the conversations I have had with family offices over the last 10 years in the hope that it generates some conversation on how best to gauge themselves and their managers.

In my experience, benchmarking in Family Offices can be very different to those of other asset owners, they are often very specific to the family and sometimes make less sense to those outside the circle.

Tenets of Benchmarking

Are we managing to our agreed risk and return?

  • At the aggregate level are we performing in line with our agreed risk profile?

  • Are asset class investments performing as they should?

  • Are we managing for total return and how is this measured?

  • Are potential biases or risks represented in our performance reporting?

Some Benchmarks Used

This is by no means an exhaustive list but reflects conversations with family offices.

Asset Class Level:

  • Equities – some use classis cap weighted benchmarks (S&P500, ASX 200, UK100 etc) for their geographic benchmarks. We are seeing a move to smart beta benchmarks (value, momentum, quality, volatility, yield) for active managers that have a clear style. Are we paying fees for outperformance or just the factor?

  • Alternatives – a wide range for this asset class, some having a total return (eg 5%) above an equity benchmark. The reasoning is this asset class investment has an implied premia (liquidity usually) that needs to be compensated above public markets or investment grade credit.

  • Fixed Income, Cash & Credit – Bloomberg cash and credit benchmarks seem to be the most popular for this category as well as the term deposit rate.

Aggregate Level:

  • Multi Asset Class – from Morningstar and other providers if you allocate a risk profile to the portfolio (eg. Balanced, Growth, High Growth).

  • CPI + - the more common comparison is the total return of the portfolio to outperform inflation by a specific percentage over a 5-to-7-year period. This approach is similar to sovereign wealth funds, endowments and insurance free cash flow.

  • Cash + - for those looking to surpass cash at bank or term deposit rates, often a risk comparison for families asking the question – would we have received similar returns and taken fewer risks.

  • Multi Asset class managers – should we manage all these SAA/TAA components in house, or would an external manager be worth the fees and reduced hassle?

Endowments/Future Funds

I recently provided an overview of how families and those managing their “future fund” or endowment portfolio may view this investment separately to other portfolios. It also often means different benchmarks.

  • Patient capital – take a longer-term view of returns.

  • Loss aversion triumphs over performance (downside capture vs benchmark)

  • Asset mix – often less liquid underlying assets.

  • Total return benchmarks at the assets class level (eg. 10% per annum for Real Estate, Cash+ 5% per annum for Hedge Funds).


Index Provider Data

The most effective benchmarking tool is to take the data directly from the provider (S&P, MSCI etc). A tricky one for those not paying for the data feed. If you have investment infrastructure that includes data fees you will be a big step ahead. For those without access, you may have to rely on free/limited sources such as Nasdaq Data (Quandl) or Koyfin.

Local data sets may not be a part of the platform’s offering. When engaging offshore suppliers, make sure they have or intend to have local benchmark data available.


Things to look out for:

  • Be mindful of tracking error (request it from manager), especially for recently launched funds, funds with illiquid underlying or those that are not fully replicated (sampled/optimised).

  • Fee Drag – the fee is calculated daily, and the NAV amended. The lower the fee, the lower the fee drag and affect on tracking.

  • Use end of day NAV, not the last traded price. Especially for less liquid ETFs that can be affected by some last-minute trading away from NAV.

  • Fit for purpose – some indices used by the funds may have methodology that doesn’t match your exposure and may have some active or systematic beta overlays. You don’t want stock selection risk here; you just want the market.

Active Managers

  • Does the style match the allocation (eg Growth, Value), if you are comparing internal stock selection, ensure that there is look through on portfolio construction method.

  • Fee drag can be high due to fee structure, make sure that is included.


One of the main benefits of improved reporting infrastructure is to accurately benchmark your portfolios in a timely manner.

Some examples of how families have utilised new technology for managing the portfolio:

  • Asset class and manager monitoring – they can now use their own benchmarks to determine effectiveness of each allocation. Managers usually provide their own list of benchmarks as an example of how they have outperformed. Now you can your own composite, add factor benchmarks to see if they are a) have maintained their stated style (eg. Value) and b) have outperformed an investible index version (eg, Value ETF).

  • Risk metrics – liquidity, vintage, geography etc can be used as a supplementary comparison for single stock and external managers. You can also view biases that may not be easily determined by the name on the tin.


Benchmarks are determined by the users but should also be relevant as a comparison tool. As reporting and tracking technology improves and reduce in price there is no need to manual calculate these or to take the fund managers version.

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