Benchmarking is one of the trickiest parts of portfolio reporting for wealthy families. While it might seem straightforward at first to compare performance against a benchmark. Some benchmarks are obvious such as the S&P 500 for US stocks. Other simple hurdles like CPI plus 4% or a fixed 5% return don’t offer a fair comparison and can be tough to beat. Especially when volatility is considered.
The result is simple hurdles as benchmarks can make even excellent portfolios look like they’re underperforming. After all, a straight line at 5% with no volatility is a great investment and not possible in real life. And when you compare it against the ups and downs of real markets, the comparison obscures the truth rather than illuminates.
So, how should family offices determine benchmarks for asset classes without liquid alternatives? Infrastructure and private equity stand out as tough to benchmark sectors. This post will share our perspective and offer some insights to help you improve your benchmarking and performance measurement.
The Challenge of Absolute Return Benchmarks
Fixed benchmarks such as 5% or CPI+4% create unrealistic expectations because they imply steady growth without any volatility. Equity markets, alternatives, or even diversified portfolios will naturally fluctuate. This mismatch makes the comparison unfair.
Separating Hurdles from Market Proxies
One way to address this issue is to separate benchmarks into two categories:
- Use Absolute Hurdles (like CPI+4% or 5% fixed) to measure whether wealth is growing meaningfully above inflation.
- Use Market Benchmarks (like the S&P/TSX for equities or listed REIT indices for real estate) to compare against the opportunity set available in public markets.
Using both types gives investors a clearer picture: did we meet the long-term family objective, and did we perform well compared to the market?
Custom Benchmarks for Real Assets
Some asset classes don’t have obvious benchmarks. Think gold, cryptocurrency, or farmland. In these cases, investors should build custom blends. For instance, farmland might be compared against CPI+2% plus part of an agriculture index. While crypto can use a diversified index like Bloomberg Galaxy with a CPI + absolute value. The goal isn’t perfection but to give context that reflects both expected returns and risk.
The Role of Risk-Adjusted Metrics
Risk is an important element. Investors should always consider performance through a risk-adjusted lens. While a portfolio may not always exceed CPI+4%, if its Sharpe ratio (return per unit of volatility) is stronger than a benchmark investible portfolio, it may still be outperforming in terms of efficiency. This approach recognizes that real portfolios must balance return with volatility.
Try comparing the sharp ratio of asset class returns to the sharp ratio of benchmarks to suss out alpha.
Keeping the Portfolio Objectives in Focus
Ultimately, benchmarks should reflect the role of each asset class and the overarching portfolio objective. Manager skill can be judged against indices, asset-class contributions can be judged against CPI+X hurdles, and family wealth progress can be judged against a long-term real-return goal. No single benchmark can do all these jobs at once, but a layered approach creates clarity.
Most of our clients measure their returns against a benchmark portfolio, but also against various other portfolio benchmarks including CPI +X, and custom blended benchmarks we’re constructed like a benchmark of family office allocations (based on investor surveys and publications).
Building Smarter Benchmarks
Wealthy families benefit from benchmarking that balances objectivity with practicality. CPI+4% or 5% fixed can remain as long-term hurdles, but adding market benchmarks and custom proxies for harder-to-measure assets provides a fuller picture. Answering key questions like, “Did we beat inflation?” and “Did we beat the market?” creates greater transparency and confidence.
Our family office uses reporting software the aggregate and measure portfolio returns for investors with multiple individuals, holding companies, trusts, with a variety of objectives and levels of sophistication. Our reporting service not only measures results, but aggregates data across a variety of accounts and structures into unified consolidated dashboards. This makes it easier for our clients to understand their wealth and make informed decisions.
