Benchmarking and peer groups: getting the comparison right

Not long ago, an advisor showed me a portfolio where the equity portion of the portfolio, a blended, diversified allocation, was being compared against the S&P/TSX 60 Index. When I asked about it, I was told it was “just for representation.”

That moment stuck with me — not because it was extreme, but because it’s more common than many would like to admit. And anyone who knows benchmarks knows that is not even close to an apples-to-apples comparison.

It highlights a broader issue: how easily benchmarking and peer comparisons can drift away from being truly representative.

There are thousands of benchmarks available today. Even within Canadian equities, you’re choosing between the S&P/TSX Composite Index, the S&P/TSX Composite Total Return Index, the S&P/TSX 60 Index and others.

On the surface, they seem interchangeable. They’re not.

The differences — whether it’s sector exposure, concentration or dividend treatment — can materially change the story your performance is telling.

That’s why benchmark selection isn’t just a technical decision. It’s a responsibility.

Your benchmark should be the closest possible representation of the portfolio you’re managing.

If you’re running a broad-based Canadian equity portfolio, the S&P/TSX Composite is generally the appropriate comparator — not the S&P/TSX 60, which excludes a meaningful portion of the market, including sectors like materials that are significant in the broader index.

This is standard in the institutional world. You don’t choose a benchmark based on convenience or familiarity. You choose the one that best reflects the mandate.

And if you choose something different, for illustrative purposes or otherwise, it needs to be clearly explained: what is being used; how it differs from a more comparable option; and why it’s being presented that way.

Because “representation” isn’t enough without context.

Blended benchmarks

For many portfolios, a single index simply isn’t sufficient. Balanced and multi-asset portfolios require blended benchmarks that reflect how the portfolio is actually constructed.

For example, a portfolio with a 60/40 allocation might use a blend of 60% global equities and 40% Canadian fixed income. In that case, perhaps use the MSCI ACWI as a benchmark for global equities and the FTSE Canada Universe Bond Index for the bond allocation.

That creates a more accurate, like-for-like comparison — provided the weights align with the portfolio and remain consistent over time.

The principle is straightforward: match the benchmark to the portfolio as closely as possible. And when that’s not perfectly achievable, disclose it. Footnote it. Explain it. Don’t leave room for interpretation.

Understand the universe

Peer group comparisons are often used to provide context — but they come with their own complexities. Saying you’re outperforming peers only has value if you understand who those peers actually are.

Within a single peer group, you can have portfolios with:

• Different geographic constraints.
• Varying levels of international exposure.
• Different sector biases.
• Different levels of risk.

A common example is Canadian equity mandates. Some managers run purely domestic portfolios, while others have flexibility to invest internationally. In certain markets, that difference alone can significantly impact performance.

Without understanding those nuances, peer comparisons can become misleading, especially when performance diverges. That’s why it’s critical to know how your peer group is constructed, who is included in it and what structural differences exist across participants.

Because when markets become more challenging, those differences are what you’ll need to explain.

The advisor standard

Just because something is commonly done — or even permitted — doesn’t make it the right approach. As an advisor, you should be operating at a higher standard.

That means:

• Selecting benchmarks that truly reflect the portfolio.
• Using peer groups that are relevant and understood.
• Being clear and transparent when comparisons aren’t exact.

Clients aren’t expecting perfection. But they are expecting that what they’re being shown is fair, thoughtful and grounded in reality.

That’s where trust is built — not just in the performance itself, but in how clearly and honestly it’s presented.