Similar Challenges For Money Managers
Asset allocation firms face a similar problem in the infrastructure that has been built up in the U.S. to serve “style box" investing styles. That infrastructure is manifested by a reliance on benchmarking, where consultants, dealers and investing platforms assign theoretical performance standards based usually on static mixes of equity, fixed income and alternatives.
The results often bear little resemblance, and even less relevance, to the funds or portfolios that are subject to the analysis. This is a travesty, since multi-asset strategies are often used to dampen overall client portfolio volatility or provide a far broader perspective of global risk and return.
In fact, on most platforms, statistics related to the evaluation of risk/return and real returns (factoring inflation) are often buried in the glossy printouts of broker and platform profiles. No wonder many advisors and their clients get trapped by recency bias when evaluating managers. Rather than focusing on the process, the plan or a client's risk preferences—it’s all about the performance of a manager in the last quarter or last year.
Regulators of mutual funds force a similarly poor outcome by requiring a fund’s primary benchmark—no matter how static in construction or poorly reflective of a fund's current allocation—to be priced daily. It's an admirable requirement from a transparency perspective, but why is it the first thing an investor or advisor sees in evaluating a mutual fund? Most investors and advisors we talk to assume the first benchmark is the most relevant.
Portfolio Of Things
This "portfolio of things" representing various asset classes is a valuable investing approach that can be sandwiched between traditional "high beta" and "capital preservation" strategies.