Fund managers need to target risk rather than returns if they are to survive and prosper, according ...
Fund managers need to target risk rather than returns if they are to survive and prosper, according to Aon Consulting's head of quantitative research, Martyn Dorey.
Speaking at the recent Quantitative Investment Conference in Lausanne, Dorey said there is a level of risk to target that is independent of fund manager skill.
He said: "The level of risk to target depends on the hopes and fears of plan sponsors. If you want to outperform your benchmark, you need to take on more risk against your benchmark.
"If you dislike underperformance against your benchmark, you need to pull your risk back down again. Amazingly, we can show that the optimal level of risk to take against a benchmark is stable and it is independent of your manager's skill."
Dorey said plan sponsors hope to diversify their investments by selecting a manager that specialises in growth products, and a manager that specialises in value products.
He said: "In reality, this doesn't work; it's too restrictive. Issues such as oil prices and interest rates are much more important than just growth and value.
"What we find is that typically UK fund managers are not that different when it comes to selecting stocks. Very often, there is little dispersion among the performance of the vast majority of the active managers."
The big fear for active fund managers, according to Dorey, is that plan sponsors all go passive. He said this would be a big mistake. Funds should outperform their benchmarks over the longer term, he said, taking advice on the appropriate level of risk they should take.
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