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Do benchmarks have a benchmark?

PostPosted: Mon Jul 18, 2016 5:58 am
by DT Cochrane
One of CasP central insights is that accumulation is a relative process. Owners assess their fortunes against various benchmarks to evaluate success or failure. A corollary insight is that success can be found even in decline as long as one's decline is less than the average.

However, a recent about assessment management has me thinking about the meaning of the benchmarks. The article describes a shift against what it calls 'active management' funds. These are contrasted with 'passive funds.' The former involve active stock choices, making bets on undervaluation and future outperformance[1]. The latter are also known as index-trackers and just replicate the performance of a benchmark, such as the S&P 500. The article notes that "index-trackers already account for 40 per cent of the $9tn in US equity mutual funds and exchange traded funds, and the shift is accelerating." This suggests either 1) a large swath of owners are content with simple accumulation rather than differential accumulation; 2) owners are putting larger shares of their ownership stake into the relative safety of merely going with the accumulatory flow.

My suggestion is that this movement presumes a base level of positive return. But, the insight of CasP remains: returns without a benchmark are meaningless. So, is there something beyond the market benchmarks that owners would be measuring their success against? Do they want to be outperforming GDPpc? Do they want to be outperforming wage growth? In other words, is there a benchmark for the benchmarks?

[1] Higher risk funds will also make bets on overvaluation and short stocks.

Re: Do benchmarks have a benchmark?

PostPosted: Mon Jul 18, 2016 8:53 am
by blairfix
Excellent question Troy. My gut instinct would be that the goal is to beat the rate of interest. If you cant't do that than there is no point in owning equity. Better to keep your money in the bank.