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Benchmark constraints

05 November 2015

Rohit Ahluwalia, Head of International Investment Solutions

Having worked in the wealth management industry for the last 10+ years, I have grown increasingly frustrated by the direction it seems to be moving in. My frustrations are being driven by the emphasis on shorter-term measures, such as beating the benchmark or peer group over the next quarter, as opposed to focusing on the most important goal of meeting private client objectives.

There are two key implications for private clients.

Firstly, Investment Managers are in constant fear of underperforming their benchmarks or peer groups and therefore have become reluctant to take on positions against the consensus, or deviate from the benchmark.

Secondly, meeting the client’s personal investment and lifestyle goals can be forgotten. During 2008, this point would have been particularly relevant for many Investment Managers. In some cases, their performance would have outperformed the benchmark, despite falling by over 20%. Whilst some may have felt proud of this relative strong outperformance, their clients would have suffered. Sometimes the respective interests of Investment Managers and clients can be misaligned. The greatest risk is failing to understand and meet your clients’ goals; underperforming the benchmark over a single quarter, is not.

The most important objective is meeting the client’s goals.

Don’t get me wrong, I am not completely disillusioned. I fully recognise benchmarks and peer groups serve as a decent “yardstick” to see how a manager’s performance compares. However, if we do use these sorts of relative measures, I would suggest doing this over a longer period, such as 3 years, to allow a better alignment of interest. At the same time, these measures should be secondary to the most important objective of meeting the underlying client’s objectives.

There is of course a risk of standing up against the crowd, you may get it wrong from time to time. However, I believe a robust, clear and transparent investment process should ultimately tilt the odds in favour of delivering longer-term success. Unfortunately for most clients, finding managers who are willing to stand up and take positions against the consensus are a rare find these days. More often than not, at Vestra, our portfolios will often look strikingly different from our peers as we are not afraid to stand against the crowd. This is something we are proud of.