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or ranking similar funds’ performance against one another (no small feats), the benchmark process has become granular and precise. These benchmarks, along with advanced analytics, are able to separate the returns inherent in a strategy (beta) from the returns attributable to the manager (alpha). The indices that these benchmarks are based on are being transformed into investment vehicles that allow investors of all walks to better allocate assets across styles, sectors and geographies. The next wave of indexing is already in progress, helping to deliver new sources of performance in transparent and efficient vehicles.
At TABB Group, we believe that the change in benchmarking has been for the better. It has moved beyond a one-size-fits-all mentality to a more nuanced craft that helps locate true sources of risk and returns. Armed with this new information, asset allocation is moving beyond the alignment of investment goals to the historical performance of different asset classes to a new world with products and strategies designed specifically to match particular goals. Furthermore, this custom benchmarking signals a radical evolution in the role of institutional asset owners from investors to risk managers.
Indexing has simultaneously opened the door to new markets, lowered the cost of beta and uncovered new forms of beta. Index providers have helped ETFs attract more than $700 billion (according to industry statistics) in just over a decade. Now, indexing is moving beyond the staid world of market-capitalization, weighted equity indices into alternative weightings, leveraged funds and short funds and spreading into energy, metals, currency and commodities.
There is no slowing the tide of indexing. Pension plans need better ways to measure the performance of alternative asset managers. ETF, ETN and other index-based managers need more products in the pipeline. The fallout from the current credit crisis will create pressure to develop more transparent indices for OTC products.
Finally, indexing purveyors have much to gain through the commoditization of portfolio management. MSCI, for example, just launched a highly successful IPO and is on the lookout for acquisitions in this space. News Corp.’s Rupert Murdoch will be looking to monetize his purchase of Dow Jones & Co. Standard and Poor’s, FTSE and Russell have successful franchises. In other words, it is only a matter of time until there is an index of indexers.
The 2007 TABB Group study on Performance Anxiety:
A Buy-Side Study on Benchmarks and the Investment Process
For this in-depth, 2007 study on benchmarks and the investment process, TABB Group spoke with 38 participants, including pension plans and investment managers in the US, the UK and across the European Union. Participants were responsible for or managed a total of $2.32 trillion dollars. We also spoke with a number of investment consultants regarding their role in the asset-allocation and benchmark-selection process. Discussions covered the benchmark-selection process of traditional indices, the rise of indexing and trends within benchmarking such as customization, global index families, and liability-driven investing. We talked about the desirable characteristics of a benchmark, the level of satisfaction with current index providers and how these services could be improved. |