To benchmark, or not to benchmark?

Aberdeen Asset Management senior investment manager Andrew Preston has dispelled what he calls the myth that benchmarks are a good starting point for investing.

Speaking at the PortfolioConstruction Conference yesterday, Preston said that while benchmarks provided information about past performance, they were unable to tell investors about the prospects or worth of companies.

“Benchmarks don’t tell investors anything about the quality of companies; are they good or bad companies, what is their management like, what is their history?” he said.

Preston also argued that benchmarks do not reflect world productivity and that biggest wasn’t always best.

“Large companies don’t always prove to be the best investment; sometimes medium to small companies do better, but indexing or benchmark investing leads you to the larger companies.”

Preston suggested a better investment strategy would be to focus on high quality companies, adding that perhaps advisers should be looking for fund managers that were benchmark aware and not benchmark driven.