In­form­ing while chal­leng­ing

Finweek English Edition - - Property Compass -

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

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