Executive Summary
James Montier maintains that policy benchmarks are effectively an accident of history, and if you were starting afresh today, you probably would not come up with a policy benchmark. It seems that questions surrounding investment are rarely answered from an investment perspective. For instance, when discussing the death of policy portfolios, one of the questions he encounters most often is, “So, how should we measure you?” It appears that many investors prefer measurement precision over investment returns. In this paper, James argues that policy portfolios and various successors (such as risk parity and life-cycle/glide-path funds) are deeply flawed from an investment perspective. In particular, two common failings they share are a mismeasurement of risk and an indifference to valuation. He concludes that a strategic asset allocation that alters the asset mix based upon the opportunity set offered by Mr. Market makes far more sense from an investment perspective. (In modern parlance, this translates as a benchmark-free, real return focus.)
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