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Mercer’s Muysken pinpoints non-benchmark myths

SWITZERLAND - Institutional investors considering non-benchmarked mandates only to reduce equity market exposure risk should consider a number of alternative options first, a top researcher from Mercer Investment Consulting has told a conference.

Bill Muysken, the firm’s global head of research, speaking at the IFM conference in Geneva, pinpointed the myths surrounding this kind of mandate, which is a hot topic in the UK.

Muysken said there could be a potentially “big appetite” for non-benchmarked, or unconstrained, mandates.

Earlier this month Mercer’s rival Hewitt Associates said 20 of its clients had allocated assets to so-called ‘unconstrained’ equity mandates – up from six in July 2004.

Such mandates tend to be relatively small, equity-based and to last at least five years. Performance is generally measured in terms of absolute returns or inflation plus.

They tend to be popular because they are seen as a remedy to “benchmarkitis”. Muysken said: “There is a feeling that skilled managers should be given scope to take or reduce risk when they judge the outlook to be positive or poor.”

Another common argument Muysken cited was the perception that skilled non-constrained managers should outperform over the long term.

Establishing the performance of non-constrained managers, however, may prove difficult.

Comparison with peer-group mandates would transform the mandate into a de facto benchmarked mandate, he told the conference. The institutional investor could rely on qualitative evidence: “But how do you avoid them pulling the wool over your eyes?”

Risk control must be tackled by the investor methodically, he said. Investors must think of a “worst case scenario” and decide how to cope with it should it arise.

They should also clearly communicate their risk tolerance to the manager and accept “that substantial short-term underperformance relative to benchmarked (mandates) could be possible”.

“Absolute returns could be absolutely negative at times when the manager gets it wrong.

“If you want to reduce equity risks, reduce exposure to equity markets, reduce exposure to equity if you have been burnt.” he suggested.

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