ISIS dismisses "arbitrary benchmarks"
UK - The chief investment officer at ISIS Asset Management wants the investment industry to rethink its views on benchmarking to an index.
"What's required is a fundamental shift away from arbitrary benchmarks which are largely historical accidents and which have undergone substantial turnover," said ISIS CIO Robert Talbut.
The comments are part of a trend that has seen the concept of benchmarking come under scrutiny.
Last month a survey by Hewitt Bacon & Woodrow found that most UK fund managers believe that benchmarking against an index prevents them from backing their best ideas, while State Street Global Advisors has suggested that pension fund benchmarks should be related to a scheme's liabilities and solvency.
Talbut said the largest 10 stocks on the FTSE 100 Index now account for 54% of the index, up from 36.45 in 1986 - and that the index "paints a very inaccurate picture" of UK companies.
"The current indices are unsatisfactory for all sorts of reasons," he added. He said there is a mismatch between the industry sector composition of the FTSE All-Share Index and each sector's contribution to the UK's gross domestic product.
"Where this presents problems for investors is with their asset allocation," Talbut said. "You may take a view on the UK economy to drive an investment decision but the simple fact is that buying the typical UK equity fund isn't a very accurate way of getting that exposure."
Index provider FTSE said Talbut was taking issue with the concept of benchmarking, not indices themselves. "I think it's a fund management issue," said spokeswoman Sandra Steel. "If clients want a GDP-weighted index we can provide it." She added that FTSE provides customised indices to clients' specifications.
Talbut also points out that only 35% of the sales revenues of FTSE100 companies are derived in the UK. "Some of these are excellent companies," said Talbut. "It is, however, simply wrong to keep thinking of them as 'British blue chips'."
The concentration of the indices is a potential problem, Talbut says. "The indices are so concentrated, investors in funds which track or are benchmark-constrained are only gaining an illusory level of diversification.
"Wouldn't it be better for investors to use benchmarks which actually allowed them to focus upon what makes a good company?" Talbut asks. "The point is that the benchmark would have to change to one based upon a real economic measure such as inflation...It seems to me that this would meet the needs of end investors far more than a stylised index, the beating or not of which has little direct relevance for everyday investors."