jigsaw

Many of you might be acquainted with the following statements of, “Fund ABC trounced the market by 5%” or “Fund XYZ lagged the market by 10%”. No one ever bothers to explain “WHAT IS THIS MARKET THAT YOU SPEAK OF?


Is It The Fish Market?

Nope! It most definitely isn’t! Or for that matter, any food related centres. As defined by Investopedia, the market can be defined a place where securities are traded.

We can view the market as a proxy or benchmark of the overall performance of a pre-determined area under consideration. If one invested 100% in Singapore Listed Large Cap Companies, the relevant yardstick to measure your performance would be the SPDR Straits Times Index (STI) ETF (SGX:ES3), which included the top 30 stocks listed in Singapore by market capitalization. Details on STI constituents can be found in our earlier article!

STI ETF Compare

The STI ETF’s investment objective was to replicate as closely as possible, before expense the performance of the STI. The STI is actually an “imaginary” portfolio of stocks or some call it as “paper trading”. Hence Exchange Traded Funds were created to allow a legit avenue for investors to replicate these portfolios as much and as cheap as possible. As shown , the STI ETF really does quite a good job replicating the STI (Slight difference from fees).

Why Is It Important To Select The Right Benchmark? 

Quoting Albert Einstein on this matter, “Everybody is a genius. But if you judge a fish by its ability to climb a tree, it will live its whole life believing that it is stupid”.

For an investor invested solely in Hong Kong and China listed entities, relevant benchmarks to measure performance against would be:

1)    Hang Seng Investment Index Funds Series II – HIS ETF (2833:HK)

The fund invests in the constituents stocks of the Hang Seng Index, the main indicator of overall market performances in Hong Kong

2)    Hang Seng Investment Funds Series – H-Share Index ETF (2828:HK)

The fund invests in the constituents stocks of the H-Share Index, which are shares of companies incorporated in Mainland China traded on the Hong Kong Stock Exchange.

If we were investing in the Hong Kong and China markets, the above 2 would be a much better yardstick relative to using the Lyxor ThaiSET 10US$ (SGX: P2P) which closely corresponds to the performance of the top 50 stocks listed on the Stock Exchange of Thailand’s main board by market capitalization.

Why would one use the performance of the Thailand market to measure a portfolio with Hong Kong Companies? It just doesn’t make sense!

Although these 2 countries are close by proximity, using a Thailand as the backdrop to judge the performance of Hong Kong operations would be akin to the “judging a fish by its ability to climb a tree”.

Stay tuned for the next part on what does it mean by “outperforming the market” 😀

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Cheong Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Cheong Mun Hong doesn’t own shares in any companies mentioned above.

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