Home / Asset management / Why we should pay less attention to benchmarks, and more to value creation

The benchmarks that are supposed to measure performance and create alignment with end investors are working against asset managers, and the industry must find new ways to demonstrate value before it’s too late, according to MFS.

It is a truth universally acknowledged that nobody – from massive pension and sovereign wealth funds to the asset managers that they invest with – actually likes benchmarks.

They were born from a desire to create accountability, but the humble benchmark is now the bane of many investors’ existence, who struggle to align the horizons they actually invest towards with the yearly movements of indices that look more and more pumped up.

“Long-term value creation is not the main objective,” Carol Geremia, head of global distribution and president of MFS Investment Management, says. “The main objective is chasing past returns and chasing things over shorter periods of time, which not only increases risk but make it harder to think about allocating capital responsibly, deal with sustainability issues and put other people’s money to work for their long-term benefit.”

MFS has been around for 100 years; it created the world’s first open-ended mutual fund, and it knows that accountability didn’t always look like this, nor was it enforced through an investable asset.

“We’re afraid of not being held accountable, but we’ve got to disconnect it from the way it’s playing out,” Geremia says. “What is so imperative, which is measurement and accountability, has at some level been working against us in terms of value creation.”

It’s easy to read self-interest in the suggestion that we all pay less attention to benchmarks. But what Geremia is really worried about is short-term alpha all the time, and she wouldn’t mind more emphasis on metrics like peer comparison (about which there’s plenty of grumbling in Australia). Nobody gets the full cycle anymore; they get three or five year chunks of it, and investors chase the hot new thing – which usually reverts.

“I think we’ve just got to recognise the other elements that can demonstrate evidence in value and great risk management. I look at the GFC, the Tech Bubble, I go all the way back to ’87. The smart people know that going against the grain at the right time is where the real money is made. But even with such a mature, large industry, we’ve fallen in the trap of a lot of pro-cyclicality and chasing… if you say you’re long-term, prove it.

“There’s a great quote: ‘we’ve gotten really good at moving money, not investing it.’ We chase risk exposure as our investment ideas versus investing in companies because we think they’re incredible and will power the future. I think we can have a combination of both, but we’ve dumbed down the things that build resilience. If we could bring some of that to the fore, or create more precise measurement around what it looks like, I think we’ll help investors really think about resilience before it’s too late.”

Some “really deep thinking pension funds” are working on different measurements, and Geremia suggests that the industry might soon start judging performance relative to the desired long-term outcomes of their end investors. MFS itself changed much of the reporting to the independent boards of its own mutual funds after realising that they were misaligned, and it’s been “fabulous”.  

“We built these reports that highlighted the three-year number because we thought that’s what the board wanted us to do,” Geremia says. “And if with no conversation, sure, you show them three and they think that’s the most important number, and then seven and 10. But then all our narrative is that our goal is to outperform a full market cycle. Three years is less than half a market cycle, but the board thought that was the destination.”

“Nobody contemplated that a full market cycle is seven to 10 years, and nowadays closer to 11. So how do we think about holding a manager accountable based on that investment objective?”