A benchmark-driven investment strategy is an investing strategy in which portfolio managers seek to outperform a specified benchmark index, such as the S&P 500.
To implement a benchmark-driven investment strategy, portfolio managers first identify the market opportunity set and then construct a portfolio that they believe will outperform the benchmark index. The portfolios are typically diversified across asset classes and sectors.
Portfolio managers use a variety of analytical tools to select individual stocks or other securities for inclusion in the portfolio. They also use active management techniques, such as market timing and security selection, to try to generate alpha.
Benchmark-driven investment strategies can be used to manage both equity and fixed income portfolios. In general, these strategies are more common in the equity markets, as it is easier to generate alpha through stock selection than it is in the fixed income markets.
There are a number of different benchmark-driven investment strategies, including growth, value, and momentum investing. Each of these strategies has its own unique approach to stock selection and portfolio construction.
Growth investors seek out companies with strong fundamentals and attractive valuations. They believe that these companies will outperform the market over the long term.
Value investors look for companies that are undervalued by the market and believe that they will eventually be recognized for their true worth.
Momentum investors focus on stocks that have been recently outperforming the market and believe that the trend will continue.
Benchmark-driven investment strategies can be employed by both individuals and institutional investors. Many mutual funds and exchange-traded funds use benchmark-driven investment strategies.
The main risk associated with benchmark-driven investment strategies is that they may underperform the market in periods of prolonged market downturns. This risk can be mitigated to some extent through diversification and active management.