What it means
The word comes from golf, where a bogey was once the score a competent player was expected to shoot. In finance it kept that meaning of a standard to beat, and it is used loosely for any agreed target, whether an index, a fixed percentage or a competitor's return.
A bogey matters because raw returns mean very little on their own. A fund that returned 11% looks good until you learn that its bogey returned 14%, at which point the manager has destroyed value relative to simply buying the index.
The choice of bogey is therefore a negotiation with real money attached. Managers prefer a benchmark that is easy to beat, while trustees should insist on one that genuinely reflects the assets held, the risk taken and the fees charged.
In practice the bogey appears in the investment mandate, the fee agreement and the quarterly report. Performance fees are often payable only on returns above the bogey, sometimes with a high water mark so the manager cannot be paid twice for recovering the same ground.
The term is also used outside fund management for internal targets. A sales director may describe a $5,000,000 quarterly number as the bogey, and a treasury team may set a borrowing cost bogey that any new facility has to beat.
The nuance to watch is benchmark mismatch. If a manager holds small companies but is measured against a large company index, the comparison tells you almost nothing about skill and a great deal about which part of the market happened to do well.
In practice
Real-world examples.
Example
A charity's investment committee sets a bogey of a global equity index plus 1% a year for its growth portfolio. The manager returns 10.2% against an index return of 10.0%, so despite a positive year the committee records a 0.8 percentage point shortfall against the agreed target.
Example
A family office negotiating a new mandate rejects the manager's proposed cash-plus bogey as too easy to beat. The parties settle on a blended index matching the mandate's 70% equity and 30% bond split, which makes the quarterly reports genuinely informative.
Example
A corporate treasurer sets a bogey for refinancing of the existing facility's all-in cost of 6.4%. Three banks quote, the best offer comes in at 5.9%, and the treasurer can show the audit committee a clear 0.5 percentage point improvement against the stated target.
Formula
Calculation
Excess return = portfolio return - bogey return, and value added in dollars = excess return multiplied by the portfolio value. Suppose an $8,000,000 equity portfolio returns 11.5% over a year while its bogey index returns 9.0%. Excess return is 11.5% - 9.0% = 2.5 percentage points. In money, that is 2.5% of $8,000,000, which is $200,000 of value added before fees. If the mandate pays a performance fee of 20% of the excess, the fee is 20% of $200,000, which is $40,000, leaving $160,000 of net value added for the client. Had the portfolio returned 8.0% instead, the excess would have been 8.0% - 9.0% = -1.0 percentage point, a shortfall of $80,000 and no performance fee at all.Case study
Seen in the real world.
Wrenfield Foundation is a fictional endowment used purely as an illustrative example. Its $60,000,000 portfolio was invested mainly in small and mid-sized domestic companies, but the mandate had set the bogey as a large company blue chip index because that was the number the trustees recognised.
For three years the manager appeared to be a star, beating the bogey by 4 to 6 percentage points annually, and earned performance fees of roughly $1,400,000 in total. A new trustee then rebuilt the comparison using a small company index and found the portfolio had actually lagged a fair benchmark in two of those three years.
In this invented scenario the trustees changed the bogey to a blended small and mid-cap index, reset the performance fee to apply only above that benchmark, and added a high water mark. Fees fell sharply and the reports finally said something useful about the manager's skill.
Watch out
Common mistakes.
- Judging a manager on absolute return alone, when a 12% year in a market that rose 20% is a poor outcome.
- Accepting whichever bogey the manager proposes, which is how portfolios end up measured against benchmarks that bear no relation to what they hold.
- Forgetting fees and costs when comparing with the bogey, because an index return is theoretical and your return is net of charges.
Questions
People also ask.
Is a bogey the same as a benchmark?
In most conversations yes, although bogey is the more informal word and is also used for internal business targets that are not market indices.
Who should choose the bogey?
The asset owner or its advisers, because the benchmark is the yardstick for both performance judgement and performance fees.
What makes a bogey appropriate?
It should match the mandate's asset classes, geography and risk level, be published independently, and be investable in practice rather than hand-picked after the event.
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