What You Need to Know
We think the approach to benchmarking used by much of the industry should be questioned. Our thesis is that we are in a new regime, with different structural forces compared to those that existed prior to the pandemic. This raises questions about the validity of benchmarks that were set before.
We suggest that, in an environment of higher equilibrium inflation and lower real return from financial markets, inflation should play a larger role in being a benchmark for many investors. Meanwhile, in the assessment of active managers, the benchmark should probably be multivariate and take into account cheap access to factors.
This issue has implications for the meaning of risk. Is risk the deviation from a financial-market index, some measure of volatility or the loss of purchasing power?
