UK - Indices used to benchmark manager performance are unsatisfactory and need a radical rethink, Isis Asset Management claims.
Chief investment officer Robert Talbut said indices in developed markets made a “very poor proxy for gaining specific geographic exposure to a country” and represented the industrial mix poorly in virtually all cases.
He said research from Isis’s strategy team showed there was a mismatch between the industry sector composition of the FTSE All-Share Index and that of each of the sector’s contribution to UK gross domestic product.
“This presents problems for investors with their asset allocation,” explained Talbut.
“You may take a view on the UK economy to drive an investment decision, but the simple fact is that buying the typical UK equity fund is not a very accurate way of getting that exposure.”
He pointed out that while financial companies represented 28% of the stock market they contributed less than 7% of UK GDP and claimed current benchmarks and indices only gave the illusion of diversification.
“When half of the index is accounted for by just 10 names, and three companies alone account for over 20% of the entire market, the impact of the 600-plus other UK listed companies is watered down.”
But Talbut stressed that simply tweaking the benchmarking system is not enough to make it a more accurate measure of performance.
“What is required is a fundamental shift away from arbitrary benchmarks which are largely historical accidents and which have undergone substantial turnover.”
In June, Hewitt Bacon & Woodrow made the contentious claim that “blindfolded monkeys” would give pension schemes a better measure of returns than peer group benchmarks and indices.
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