Comparing with an index when investing in an Investment Fund is essential: we tell you why

If we consult the complete prospectus of an investment fund, we will see that the product tends to be compared against an index or benchmark which serves as a portfolio benchmark to try to track the performance of a broad asset class that is integrated.

You have to be very punctilious in this matter, because normally the commercials of a fund will offer us the returns of the product that have been obtained over time through the simplified prospectus (We should always require the full prospectus), and not those returns compared to the benchmark.

The reason we should take a look at the benchmark is that stock market selective are not managed by any manager, they simply track the returns on a purchase and hold basis of the incorporated financial instruments (stocks, bonds, commodities, …) nor do they assume a reallocation of values ​​that may be more attractive in different market cycles or market events.

Therefore, the indices represent a passive approach to investing and they can offer a good benchmark against which the investor can compare the performance of a portfolio that is being actively managed with intrinsic stock selection and reallocation of weights.

With the reference of these indices, the investor can assess whether the portfolio management is generating value, which will happen when the return of the fund’s portfolio is higher than that of the index. On the contrary, those financial products to portfolios that are not capable of beating the referenced stock indices, means that the manager is not adding value with his management.

If a manager over the years is unable to beat the stock index, the investor should abandon that product since it has a clear opportunity cost with a detriment to profitability.

Many mutual funds managed primarily by the banking environment tend to perform index management on several of their mutual funds. This means that They seek to replicate the index with their product and charge substantial commissions that negatively influence the differential of returns on the index.

Next we show the example of the background BBVA Stock Exchange Euro. This product offers a profitability of 20% so far this year … not bad. With this profitability many would be tempted in their hiring.

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But if we make a comparison with the benchmark, is a product that has tended to lag behind (Management takes the performance of the EURO STOXX 50 PRICE index as a reference). According to Morningstar data, at three years the annualized alpha is 6.61 negative percentage points.

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With these data, we can conclude that the management provided does not generate value And, if we want exposure to this index, it is advisable funds that provide a sustained alpha or go to passive management with an ETF or index fund that replicates the behavior of the EURO STOXX 50.


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