Benchmark-itis a problem, says Hewitt’s Ashton
UK - Pension funds do not need to rule out equities in their quest for returns, but must step away from "benchmark-itis", says Hewitt Bacon & Woodrow.
Hewitt's Antony Ashton told conference delegates that hedge funds and other alternative class are not the only answer in the search for returns.
"But they must ditch traditional notions of risk and have the courage of facing a change," Ashton told the Pension Show.
Once pension fund managers find competent managers, they should not lightly sack them, on the basis of a bad year's performance.
"Benchmark-itis" or "index-hugging" constituted "a real problem,” he said, while getting long-term value from traditional active equity management is proving hard, Ashton said.
"Active managers are not always doing the job you think they ought to be doing," Ashton warned. He pointed out that in some cases active managers put emphasis on risk control rather than "investment merits".
"It is their risks I am talking not your risks," he also said, citing the example of oil giant Shell. As the company undergoes changes and more listing will be transferred to the UK in the spring 2005, managers would be likely to double their weighting in Shell.
"Irrespective of whether they like it Shell or not, it is concentrating risks relative to the index rather than merits."
Ashton also addressed the issue of lack of diversification. In the UK he continued, half of the stock market is concentrated in 10 stocks and pension funds are no exception to this trend.
"Benchmark-itis" puts constraints on to managers increasing risks and actually reducing returns, Ashton said.
Index-tracking was "cheap and easy" but does not rule out risks, while "unconstrained equity approach offers higher return potential and with no more risk".
There was a “greater likelihood of achieving returns from active management if you free good managers from unnecessary constraints”.
The unconstrained approach, however, has a "scale problem" he said in the debate that followed his presentation.
"There is the capacity component, in this respect it is like in hedge funds, they close at a certain point, as they ought to do."
"We think it is a good thing, necessary to align the interests of managers to perform for existing clients."