Standard Life Investments, the global fund manager, believes that bonds still have an important role to play in an investment portfolio but that investors should move away from bond benchmarks, which are structurally flawed, to performance targets referenced to cash.
Speaking today (12 September 2011) at the Centre for Investor Education (CIE) on the Gold Coast, Queensland, Australia, Euan Munro, Head of Multi-Asset Investing and Fixed Income, at Standard Life Investments, said:
"To date investors have generally been satisfied with bond managers ‘doing well'. However if we enter a world of negative bond returns, fund managers may become blind to the risks embedded in the benchmark and an enormous perception gap can emerge between the fund manager and client."
Euan believes that performance targets referenced to cash would represent a far superior reference point to measure a fund manager's skill.
"We believe that there is still a very large universe of bond opportunities for active investment managers to build a portfolio to achieve modest levels of return for a relatively low level of risk.
Despite cash in itself not being a perfect risk-free rate, it is at least a good comparison for investors who have the option of putting money in the bank or entrusting it to a fund manager.
"Provided investors have the will to set return and risk targets for bond managers in absolute terms, the bond manager can maximise the outcome by creating an investment strategy that delivers investment returns for the relevant levels of risk."
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