For Professional Clients and, in Switzerland, for Qualified Investors only. In Israel for Sophisticated Investors only.
English
  • English
  • German
en
  • en
  • de
Filter by theme
Filter by date
Filter by boutique
Filter by theme
Filter by date
Filter by boutique
No posts matching your criteria
Clear theme
Clear all
No posts matching your criteria
Clear date
Clear all
No posts matching your criteria
Clear boutique
Clear all
For Professional Clients and, in Switzerland, for Qualified Investors only. In Israel for Sophisticated Investors only.
English
  • English
  • German
en
  • en
  • de
© 2019. BNY Mellon Investment Management International Limited. All rights reserved.
IDEAS AND KNOWLEDGE TO INSPIRE YOUR INVESTMENTS THINKING
8 November 2018

Tied to the benchmark?

Market cap-weighted benchmarks rose to prominence in the decades following the 1950s, when the concept of market ‘beta’ (representing the ‘fully diversified market portfolio’) was developed as part of modern portfolio theory[1]. Benchmarks are now the common proxy for beta. Originally, these benchmarks were used as a guide to help measure a manager’s performance. However, over time, market participants became fixated with analysing every difference between a portfolio and its benchmark, potentially tying investors closer to them and away from their core objectives.

 

With the rise of benchmark-aware investing, either explicitly (through passive mandates) or implicitly (via ‘closet’ indexing active portfolios) much of the industry has appeared to lose sight of this income-oriented objective, focusing instead on price moves in a market where the instruments redeem at par.

 

In our view in the credit markets, this obsession with benchmarks raises four key problems: indices are structurally-biased towards the most indebted issuers, market weights can lead to concentration risks, passive funds are prone to forced selling and ‘closet’ indexing can tie active funds to flawed benchmarks.

 

In our view, being more benchmark-agnostic, through looking for the most compelling credit opportunities, maximises the potential to capture beta and alpha more efficiently. In turn, we believe flexible strategies can help investors exploit the artificial barriers created by benchmarks.”

 

Gautam Khanna and James DiChiaro, senior portfolio managers. Insight Investment – a BNY Mellon Company

 

[1]Source: Portfolio Selection, Harry Markowitz, The Journal of Finance, 1952. 3 Bloomberg, Bank of America Merrill Lynch, Insight, as at June 2018

Please note the content on this website is for Investment Professionals only and should be shared responsibly. No other persons should rely on the information contained within this website.

 

Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.

Subscribe to updates