UK - Schemes have been warned that unconstrained benchmarks could increase their portfolio risk.
State Street Global Advisors and Credit Agricole Asset Management spoke out after research by Hewitt Bacon & Woodrow showed that 82% of fund managers believed unconstrained mandates would improve investment performance.
The consultant’s study also found that 70% of fund managers believed index benchmarking prevented them from backing their best stock ideas.
But SSgA UK chief investment officer Rick Lacaille warned that the requirements for selecting an unconstrained manager would be different from a conventional selection.
“Looking at it from the clients’ perspective, they’ve got to think about the level of risk that might be taken if they relax the constraints and whether the fund manager has enough alpha to justify this, because it will lead to a portfolio with less predictable characteristics.”
Lacaille also hit back at Hewitt’s claim that “blindfolded monkeys” could provide a better measure of returns than indices.
He said: “From the consulting firm which brought forward the unconstrained mandate comes the blindfolded monkey benchmark.
“Evidently it would be better to compare our stock-picking efforts to a blindfolded, dart-throwing monkey rather than Bill Sharpe’s market portfolio. This concept might bring an entirely new dimension to the index-tracking business as we staff up on 20,000 blindfolded monkeys.”
Credit Agricole Asset Management head of UK marketing Chris Johnson said the concept of unconstrained benchmarking was a short-term fad.
“When the market starts to do the work again – and it will happen one day – all this stuff about high conviction portfolios and highly active management will disappear straight out of the window.”
Hewitt investment policy group chairman Kerrin Rosenberg said: “If we get back into the good times and everybody thinks it’s a no-brainer, all stocks go up, who cares?
“I just don’t think we’re heading back to that environment.”
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