Benchmark agnosticism, the practice of declaring yourself a manager without benchmark, is a trendy subject. Acknowledging that you pay no attention to standard and replicable indices in the market apparently makes you a more desirable (if not better) manager.

Benchmark ‘customization,’ the practice of fragmenting benchmarks to suit your investment style (or business objectives), is equally trendy and much trickier. In the wrong hands it can be downright misleading.

What the above paragraphs say is that freedom from the discipline of properly measuring one’s results appears to garner a sizeable audience, itself regularly smothered by elusive concepts and baffling performance reports.

I like simplicity in benchmarks: the very basic world of investment alternatives reduces to equities and government bonds. Variants, mostly a combination of the two plus more or less aggressive market timing, must demonstrate their worth over time.

Recently I talked to the chief investment officer of an active manager, and I asked for supporting evidence to her claim they are good at what they do. After a few hours I received, among other data, this summary picture:

These statistics look good over a reasonable period. They show a certain consistency and progression which is desirable in performance records. I notice from the graph at the top right an odd discontinuity in favor of the manager beginning in 2015. This makes me wonder what the benchmark is, and after a further request I received the following table:

As is often the case, the benchmark here is used not to help in understanding the value of the manager’s contribution but to create confusion: this manager is essentially driving its clients’ target strategic allocation (which the benchmark is supposed to represent) towards its product inventory.

I re-aggregated the above table a bit here and there, grossed-up the percentages and came up with this ‘concentrated’ version of the benchmark:

From here I further reduced the target to a simple 50/50 stock/bond allocation, using the MSCI All-Country World Index in Pounds (the base currency of the report) for equities and the Bloomberg UK Gilt 5-7 Years Index for bonds. The following graph shows the comparison of the manager’s performance (blue line) to this new index (orange line):

The manager surpasses the benchmark at the very end of the 15+ year record by a smidge. In addition, for most of the time its performance was well under the benchmark.

What else is there to say? A lot, it turns out: the manager’s record is gross of all fees. While this is true of the benchmark as well, the magnitudes make a huge difference: TERs for the manager are in the neighborhood of 1.20-1.50% p.a., depending on portfolio size; the benchmark can be replicated by anyone with an average cost of 0.20-0.25%.

There really is no reason why investors should be hoodwinked in this manner.

Roberto Plaja, December 2, 2021

Cover: The Conjurer, 1475–1480, by Hieronymus Bosch or his workshop;