If you can’t beat the natural benchmark, just invent another one.

Let’s say you only have oranges and you want to participate in a contest for best apple; what do you do? Simple: you trick the judges into believing oranges are apples.

Case in point: a few days ago a client and I were trying to evaluate the past performance of a portfolio manager; we asked for some long-term data and obtained a 12-year record of the relevant composite. (Before I go any further, I should mention the manager in question is no fly-by-night outfit with a single desk, a telephone and an internet connection like me, but one of the major international, awe-inspiring, globally distributed, multilingual institutions “dedicated” to helping investors like my client.) The data we received was gross of management fees, a strange idea given clients don’t get gross returns, and was compared to a benchmark which oddly included alternative investments.

I say oddly because if you target a certain risk level – for example, a 40% equity/60% bond allocation – you should compare yourself to a 40/60 benchmark, especially when you can get that today with two ETFs. Why then include alternatives in the benchmark? A quick look at the results and the reason pops in your face: the composite, when compared to the manager’s benchmark, is about even, or roughly -0.5% per annum with estimated management fees; the same composite, when compared to the two ETFs and net of estimated fees, is -1.6% per annum, or a compounded -17.6% over the 12-year period. As I said: you got oranges in an apples contest? Get everybody to think oranges are apples. Simple.

But debunking this stuff isn’t that simple. In fact, I wonder how regulators allow such a mishmash to be unabashedly presented to clients who are not truly “professional”. Or even how anyone who wants to help clients in understanding and in managing their money can possibly feel ethically comfortable in putting forth such garbage. But there you go: it happens, it is common and few will help you with any of it.

At a follow-up meeting with the manager the performance question was glided over as if, after all, it was just a detail. (Ever found yourself in a room surrounded by “experts” as if in a medieval siege, each of them with a different weapon but, importantly, none of them with anything of use to you?) For certain institutions managing client money is not only a business in which pricing is a matter of perspective but, even more worrying, an occasion to show off faulty analysis in order to bring you to their side.

Fascinating business, really.


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