A benchmark is a measure that can be used to compare the performance of a fund against. This is usually an index (such as the FTSE All Share Index) which will be relevant to a particular market sector (e.g. the FTSE All Share Index is relevant for funds in the UK Equity sector, because it tracks UK share prices.)
On the rplan site, benchmarks are generally other funds that are representative of a sector (rather than indices), real-world measures such as inflation, and for portfolios, the pre-selected portfolios for your target risk level.
Real World Measures
Real-world measures are useful because they allow you to understand whether a fund or a portfolio have made money in absolute terms, rather than compared to a more abstract sector-specific benchmark. For instance, if a fund hasn’t beaten inflation over a period, you would have lost money if you had invested in that fund over that period, regardless of whether the fund had a positive return.
We use funds -rather than indices- as benchmarks for investment sectors (e.g. the HSBC FTSE All Share Index Tracker rather than the FTSE All Share Index for the UK Equity sector.) This is because funds incorporate the cost of investing, which indices do not; as such, a fund is a better benchmark of an achievable rate of return within a sector. Each sector has a specific fund assigned to it as a benchmark. The fund selected will preferably be a tracker fund (which tracks an index), rated by Rayner Spencer Mills Research. Where no tracker fund exists for a sector, an active fund is used; where no rated fund exists in a sector, a non-rated fund is used. In all cases, the fund is selected because it is representative of the sector.
In some cases, no one fund encapsulates a single sector (e.g. Europe including the UK.) In that case, we have selected a composite benchmark, which is made up of two or more funds in specific proportions (e.g. the Europe including the UK benchmark is made up 90% by the HSBC European Index Tracker fund, and 10% by the HSBC FTSE All Share Index Tracker fund.)