PT - JOURNAL ARTICLE AU - Mike Aked AU - Rob Arnott AU - Omid Shakernia AU - Jonathan Treussard TI - Hobbled by Benchmarks AID - 10.3905/jpm.2018.44.2.074 DP - 2017 Dec 31 TA - The Journal of Portfolio Management PG - 74--88 VI - 44 IP - 2 4099 - https://pm-research.com/content/44/2/74.short 4100 - https://pm-research.com/content/44/2/74.full AB - 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