Informing while challenging
BENCHMARKS: shun them, hug them or race against them, they’re an indelible element of modern professional investment management. In this issue we’ve collected insights from throughout the industry to inform and challenge our views on benchmarking investment performance and its effect on manager selection and the investment process.
What better subject to introduce our new official sponsor ASISA ‒ the recently formed body that represents the entire saving and investment industry in South Africa. It has among its stated objectives to work towards more level playing fields in our industry and you’ll find plenty of like-minded contributors in this issue of Collective Insight.
All our contributors agreed on one key point: performance benchmarking in its current form could benefit from serious revision. Are we making wise decisions using historic benchmarked fund performance? Read Nicolas Davidson’s article ‒ “Perils of past performance” ‒ for some good advice on how flawed the process is.
Are we using the appropriate benchmarks? Ron Surz, a veteran pension fund consultant and prolific author on the subject of indices and benchmarks, thinks not and encourages a review of benchmark construction as a “fiduciary imperative”. Read his article ‒ “Break ranks to differentiate skill” ‒ for why he thinks benchmarks and indices have failed to differentiate skill among fund managers. Johan Swanepoel adds his voice by highlighting the shortcomings of balanced benchmarks where pension funds are concerned and provides us with a potential solution in “The liability benchmark”.
While benchmarks are used retrospectively they can also exert considerable influence on the investment process. Anne Cabot-Alletzhauser and Lynn van Coller add their insights to the extent to which a poor benchmark and mandate restrictions can collude to restrict investment performance. In “Uncovering the layers of noise that mask manager skill” Cabot-Alletzhauser suggests some useful procedures to distinguish skill and manager intent from luck and poor benchmarking. Coller highlights the resulting investment biases in SA’s constrained environment by asking “Skill versus luck: should that be the question?”
Then Clare Johnson warns that the use of benchmarks as a yardstick for performance fees can inadvertently incentivise higher risk taking in “Benchmarks and performance fees”.
Adrian van Pallander reminds us that fixed income requires specialised treatment in “Fixed income attribution in the investment process”.
Finally, Roland Rousseau wraps up this issue by highlighting the important differences between alpha and beta as return sources defined by a benchmark. In “Dances with alpha” he asserts true excess active fund performance is being lost in translation. What do you think? ■
Heidi Raubenheimer Graduate School of Business, UCT