Time to throw out equity benchmarks

Bigger allocation to bonds; the rise of risk budgeting; and a growing awareness of absolute return products, all suggest that the use of traditional equity benchmarks in pension fund management needs to be reconsidered. It is an idea that Alan Brown, group chief investment officer of State Street Global Advisors, has been pushing for some time. Brown argues that pension funds should shift away from using equity benchmarks because they produce a high tracking error against the underlying liabilities for which the risk premium does not adequately compensate the investor. Sadly though, the industry is unlikely to see any significant change because of the incredible inefficiency of the market for institutional investment services. Unfortunately for pension funds, simply running into the comforting arms of a bond managers is unlikely to be the solution.