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Hobbled by Benchmarks

Mike Aked, Rob Arnott, Omid Shakernia and Jonathan Treussard
The Journal of Portfolio Management Multi-Asset Special Issue 2018, 44 (2) 74-88; DOI: https://doi.org/10.3905/jpm.2018.44.2.074
Mike Aked
is director and head of Asset Allocation at Research Affiliates, LLC, in Newport Beach, CA
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Rob Arnott
is the chairman and CEO at Research Affiliates, LLC, in Newport Beach, CA
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Omid Shakernia
is a senior vice president of Asset Allocation at Research Affiliates, LLC, in Newport Beach, CA
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Jonathan Treussard
is director and head of Product Management at Research Affiliates, LLC, in Newport Beach, CA
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Abstract

In 2003, at the NMS Endowments and Foundations Conference, Peter Bernstein suggested that policy portfolios are overused, leading to excessive tracking-error constraints. In a 2004 article in this journal, Rob Arnott showed that the 20 largest U.S. corporate pension funds were willing to accept 12% annual volatility in total return, 15% volatility relative to liabilities, but only 2.5% tracking error relative to peers. Today, the use of policy portfolios is as dominant as it was 15 years ago; policy portfolios and their respective benchmarks continue to be a largely home-centric 60/40 allocation. In the view of the authors, there should be no debate on the benefits of broadly (i.e., globally) diversified policy portfolios. Broad diversification is a requirement for actively adding value over time. The authors believe that long-only investors can translate the lightly correlated sources of excess returns from the long–short space to their portfolios. They hope that investors will hear their plea: Please diversify your benchmarks.

TOPICS: Retirement, portfolio construction

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The Journal of Portfolio Management: 44 (2)
The Journal of Portfolio Management
Vol. 44, Issue 2
Multi-Asset Special Issue 2018
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Hobbled by Benchmarks
Mike Aked, Rob Arnott, Omid Shakernia, Jonathan Treussard
The Journal of Portfolio Management Dec 2017, 44 (2) 74-88; DOI: 10.3905/jpm.2018.44.2.074

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Hobbled by Benchmarks
Mike Aked, Rob Arnott, Omid Shakernia, Jonathan Treussard
The Journal of Portfolio Management Dec 2017, 44 (2) 74-88; DOI: 10.3905/jpm.2018.44.2.074
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