Thinking Outside the Benchmark

Abstract

The twin decades of 1980–1999 provided annual returns to the U.S. equity market in the high double digits, but moving forward over the next decade, returns are expected to be in the mid- to high single digits, just when corporate and public pension plans face both a growing retiree population and lengthening average retiree longevity. To meet these challenges, pension plans must think beyond their benchmarks, and remove the restrictions associated with strategic asset allocation models. Traditional asset allocation models partition the financial markets into neat benchmark boxes, perhaps useful for planning purposes but surely inhibitive for alpha extraction and return maximization.