a-car-without-a-speedometer

A Car Without a Speedometer

Would you buy a car without a speedometer?

A Car Without a Speedometer

Would you buy a car which does not have a speedometer? The lack of a speedometer does not stop a car from going from point A to point B. It’s just that you wouldn’t know how fast you are going. My guess is that you wouldn’t. An actively managed fund, which claims not to have a benchmark, is also like a car without a speedometer. By definition an actively managed fund is one which aims to outperform an underlying market. The market is most often represented by an index. In the case of Singapore stocks, the Straits Times Index represents the market. An actively managed fund which invests in Singapore stocks would aim to outperform the Straits Times index or some other index of Singapore stocks.

Active fund managers are paid fees to outperform their benchmark. So if an actively managed fund claims not to have a benchmark, then the active manager must be working for free. This is normally not the case. So an actively managed fund claiming not to have a benchmark, must be treated with extreme caution. One way to check the reasonableness of this claim is to see if other similar funds are using a benchmark. If similar funds have a benchmark and your fund does not, then it should be a cause for serious concern.

An actively managed fund which does not want to be judged is like a car without a speedometer. Just as you would not want to buy such a car, avoid actively managed funds which do not have a benchmark.