GMO's James Montier Slams The "Unhealthy Obsession" With Benchmarking Investor Returns

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While the ultimate goal of investing is to maximise absolute returns, relative returns against a benchmark has become the preferred measure of a money manager.However, GMO’s James Montier thinks that benchmarking is a good idea gone bad. He writes in the Financial Times:

“So where did the concept of relative performance originate? It probably stemmed from good intentions (as do most bad ideas). Why pay active fees if the managers don’t deliver returns above a passive benchmark? However, this idea has morphed into an unhealthy obsession with pigeon holing managers into niche buckets.”

By emphasising relative performance, investment committees may be inadvertantly affecting an investment manager’s behaviour at the cost of investors.

“Suddenly everything becomes relative, so the manager starts to think about relative valuation (i.e. is the asset I’m buying cheap relative to the benchmark), relative risk (i.e. I mustn’t deviate too far from my benchmark as I will be taking on ‘tracking error’), and, worst of all, relative return (i.e. I did a good job because I only lost 30 per cent of your investment, and the benchmark was down 50 per cent). So whilst an investable benchmark makes measuring performance an easy task, it isn’t necessarily good for focusing the manager’s mind on generating real returns. Relative benchmarks are often employed to the detriment of real returns and the preservation of capital.

Montier thinks that money managers should focus solely on value.  In other words buying low and selling high.  However, he notes that value investing isn’t always well received with those seeking immediate outperformance.

“In order to pursue a value driven approach you need two key traits – patience and a willingness to be contrarian. Unfortunately these traits are in rare supply, and become almost extinct when people act in groups (such as committees).”

Montier’s full writeup can be found here.

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