Keeping tabs on your investment manager: Iain Jenkins gives details of a new benchmark designed to help clients assess their brokers' performance

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INVESTORS who have their money individually managed have little idea if their stockbroker is incompetent or a genius. The problem is finding a sensible benchmark against which to compare the performance of a private portfolio. Investors could be forgiven for suspecting that the complexities of performance measurement are being used to hide poor performance.

This is a view shared by Cantrade, the private client broking arm of Union Bank of Switzerland. It has designed a benchmark that all private clients can use to assess the performance of their broker-manager.

The model assumes that the average private portfolio consists of 50 per cent UK equities, 20 per cent overseas equities and 30 per cent gilts and cash. At the end of each quarter the Cantrade Calculator shows what investors should have got from their assets. It also offers a simple mathematical formula to enable investors to take into account any inflows or outflows from their portfolio.

Robert Brown, deputy managing director of Cantrade, who designed the benchmark, says: 'It is not the entire answer as everyone's portfolio will be slightly different. But it does tell investors where to start asking questions.'

The calculator showed a gain of 2.7 per cent in the four months to the end of September and a loss of 5.9 per cent in the first nine months of the year. The nine-month benchmark compares with inflation at 2.2 per cent and returns of 3.7 per cent from leaving cash on deposit.

Over the period British equities measured by the FT all-share index were down 7.3 per cent, while overseas shares were up 1.3 per cent. The FT's gilt index was down 8.1 per cent.

Mr Brown says: 'I suspect that when people see how their portfolio has done against our benchmark they will decide that holding direct equity investments is too dangerous. It will speed up the move into unit trusts.'

Anyone who has suspected all along that their broker has underperformed is probably right. Most private client portfolios do not hold sufficient stocks to spread the risk. Many private client stockbrokers and portfolio managers run their own unit trust that broadly mirrors the strategy and holdings in individual private client portfolios.

The stockbroker Cazenove runs an international unit trust, Cazenove Portfolio. This is 6.5 per cent down over nine months and ranked eighth out of 27 international funds, which aim for a balance between capital growth and income.

Mercury, part of Warburgs, runs Mercury Portfolio to reflect the investments for private clients. This has lost 8.2 per cent over nine months. A Mercury spokesman said 60 per cent had been invested in UK equities, which accounts for its underperformance.

Another fund that has also underperformed the index is Kleinwort Benson's fund of its own funds, Kleinwort Benson Master Account. This is down 7.2 per cent in the nine months to the end of September and ranked 47th out of 58 funds of funds. Baring's Select Managers unit trust, another fund of funds, is down 6.8 per cent over the nine months while the stockbroker Brewin Dolphin's Dolphin Fund of Funds is down 5.3 per cent. The average fund of funds lost 3.8 per cent of its value over the period.

David Rosier, chairman of Mercury Asset Management private investors, says there is a tendency for brokers managing smaller portfolios to underperform. 'A broker might beat the index but they will have to take enormous risks with a portfolio,' he says. 'Most people wouldn't want that risk. Fear is a far more powerful emotion than greed.'

He welcomes the use of composite indices like the calculator, but cautions that investors have different requirements. Some have a pathological dislike of paying capital gains tax. Others want income, not capital growth, he says.

A free subscription to the Cantrade Calculator can be obtained from Robert Brown at Cantrade Investment Management, 125 High Holborn, London WC1V 6PY.

(Photograph omitted)

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