Compared to What? A Debate on Picking Benchmarks

Abstract

To evaluate the success or failure of active funds, we need to select benchmarks. Susan Belden of Skidmore College and M. Barton Waring of BGI hold a debate in writing over whether a benchmark should be based on a broadly accepted market benchmark, such as the S&P 500, or a narrowly defined benchmark, based on the investing style of the fund. He finds that the analyst is able to explain over 90% of price movements not traceable to publicly available information, which is consistent with a high degree of market knowledge. A significant proportion of these price changes are attributable to factors unrelated to information per se, providing support for the hypothesis that a significant proportion of company price changes are triggered by events relating to fads, fashion, or sentiment.