What is a "benchmark"?
Merriam-Webster Dictionary generally describes a benchmark as "something that can be used as a way to judge the quality or level of other, similar things."
More formally stated, Merriam-Webster Dictionary says a benchmark can be:
b : something that serves as a standard by which others may be measured or judged
c : a standardized problem or test that serves as a basis for evaluation or comparison (as of computer system performance).
Why are benchmarks important, particularly in finance and asset management?
The construction, use, and presentation of financial benchmarks is considered so important that the International Organization of Securities Commissions saw fit to publish a policy paper offering its members guidance on the principles behind good financial benchmarks (see suggested readings, below).
Why is understanding the content and construction of a benchmark important?
The CFA Institute's summary of a Feb. 2015 research article says it all: "Selecting an appropriate benchmark is critical to portfolio management and performance measurement. Differences in benchmark methodology and construction rules can lead to large differences in performance, even among benchmarks that appear similar. Understanding these methodologies and construction rules, as well as avoiding behavior associated with common benchmark myths, can aid investors in making wise benchmark choices."
Why are the WSAS MFI Shareholder Value Indexes good benchmarks for MFI equity investment exposures?
The WSAS MFI Shareholder Value Indexes are good benchmarks to use for evaluating MFI equity investment exposures because they meet all the qualities of a good benchmark. They cover a fairly consistent asset category (company equity shares) across a diversified set of companies within the same industry category (microcredit lending institutions). They represent MFIs selected for their size (equity capital bases) that accord to private equity transaction sizes made in the year MFIs are selected for coverage.
Sources for further reading on the topic of financial benchmarks:
"Does Your Benchmark Measure Up?" - CFA Institute Conference Proceedings Quarterly
First Quarter 2015 | Vol. 32 | No. 1 Source: CFA Institute Carl Bacon, CIPM | Neil E. Riddles, CFA, CIPM
Principles for Financial Benchmarks - Final Report
International Organization of Securities Commissions (IOSCO), July 2013