Reader Questions

A reader emailed in asking if it makes sense to benchmark returns vs. an index that includes foreign stocks. The short answer is that yes it might make sense. The world economy is globalizing and foreign investing is becoming more important.

In that vein using the MSCI World or something similar could be a way to go. To be clear, an argument could be made in either direction.

My own preference is to use a domestic benchmark. I use the S&P 500 to benchmark equity returns. Someone could write a thesis or two about whether the SPX is a good or bad benchmark. Perhaps we can leave that to another day and for now just focus on domestic or global.

As a US based money manager I am trying to add value vs. how the US market performs. I don't focus on benchmarking so closely that I am a slave to the S&P 500 composition. This should be obvious in that I have one third of client assets in foreign stocks and the average market cap in client accounts is around $35 billion vs. $95 billion for the SPX (these are things I have disclosed many times in previous posts).

If the hard core doom and gloomers turn out to be correct about the US economy and asset prices and our country implodes, I am sure I would make a change. Hopefully it won't come to that.

John Christy left a couple of good (as usual) comments. One questioned just whom USO is intended for. I had a discussion this morning with a friend about this who wondered if it might not have utility for a small business owner that spends a lot of gasoline for a fleet of vehicles. I suppose it could but I might think using gasoline futures (if hedging is really even necessary at all for a small business) with the help of a professional might make a lot more sense.

I think USO can have some use for retail accounts but I am not sure what that is just yet and I feel no urgency to be the one that figures it out.

John also left a couple interesting thoughts about benchmarking. He notes that despite the Third Millennium Russia Fund lagging its benchmark so badly the fund is up a lot and should not be dismissed. Who cares about the benchmark, John asks, the fund has added value for anyone that owns it. I never said otherwise. My only criticism was to wonder if the manager has nothing valuable to offer in the way of commentary given. The pool of stocks he can own are up a lot. He lags that pool of stocks consistently. The fund will do well as long as the pool he can choose from does well and if you believe in Russia the fund is not a bad way to go but the manager is not adding value vs. his benchmark but is adding value vs. the S&P 500.