Standard cap-weighted benchmarks have taken a caning recently. There’s no real renewal of interest in absolute returns funds, for several reasons, but there’s certainly more interest in looking at new ways to measure the performance of various parts of a portfolio. The main target in this benchmark beating is the MSCI All Countries World Index (ACWI), along with the more popular MSCI World Index. But even though new indexes, which reflect other, more fundamental values, are being widely discussed they have not really taken off anywhere as yet. The big problem for the world indexes is not so much that they are backward-looking, which we have always known and most funds attempt to counter with rebalancing and tactical or medium-term asset allocation adjustments, but rather because they do not actually reflect the real world.

This has become particularly apparent since the financial crisis when the emerging markets faltered only slightly before continuing on their strong growth pattern while the West, especially the G-7 countries, has continued to struggle to lift itself out of the mire. The consensus is this scenario will continue for at least several years. Here’s a sample of fiduciary investor comments made public over the past few weeks: • “Why not build your own benchmark with China and India at 15 per cent instead of 5 per cent [of MSCI ACWI]?” – Van Athukorala, senior portfolio manager, Multi-Asset Group, AMP Capital. • “The traditional market-cap indices are the least prepared to measure where the growth will come from…

Emerging markets may be your next bubble, but it has a long time to go before that.” – Carolyn Kedersha, managing director, The Boston Company. • “Emerging markets make up about 34 per cent of world GDP and they are expected to get to 50 per cent in the next 10 years. So [their] financial markets will inevitably get bigger… But I expect that the capital will come in before the markets are broadened.” – Mark Delaney, deputy CEO and CIO, AustralianSuper. • “Benchmark risk is the biggest thing that came out of the crisis for us. We’re positioning ourselves now with more emerging markets [exposures] over the next 10 years…” – Theresa Whitmarsh, executive director, Washington State Investment Board. • “Benchmarks are backward looking and North American biased… We no longer think of China as an emerging market.” – Doug Pearce, CEO and CIO, British Columbia Investment Management Corporation.

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