Bond benchmarks are structurally flawed and investors should instead reference cash as a measure of a fund manager's skill, says Standard Life Investment's Euan Munro.
Munro, who is head of multi-asset investing and fixed income at the £157 billion fund manager, says: “To date investors have generally been satisfied with bond managers ‘doing well’. However if we enter a world of negative bond returns, fund managers may become blind to the risks embedded in the benchmark and an enormous perception gap can emerge between the fund manager and client.”
Munro believes that performance targets referenced to cash would represent a far superior reference point to measure a fund manager’s skill.
“We believe that there is still a very large universe of bond opportunities for active investment managers to build a portfolio to achieve modest levels of return for a relatively low level of risk. Despite cash in itself not being a perfect risk-free rate, it is at least a good comparison for investors who have the option of putting money in the bank or entrusting it to a fund manager.”
Munro added: “Provided investors have the will to set return and risk targets for bond managers in absolute terms, the bond manager can maximise the outcome by creating an investment strategy that delivers investment returns for the relevant levels of risk.”
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