Recent times have not been easy for European investment managers. The credit crunch that followed the collapse of Lehman Brothers Holdings three years ago dealt a blow to the use of standard benchmarks. After all, why target an index if even outperformance can produce negative returns.
More recently, the euro zone debt crisis and related worries about debt levels in the U.S. have thrown into doubt, if not permanently tarnished, the decades-old received wisdom that rich-country government bonds are ultrasafe. And equities have problems of their own. The prolonged weakness of Western economies has sparked fears of a Japan-like rut that could produce low, or nonexistent, growth for a generation. Such a possibility casts a long shadow over the once-prevailing view that stocks will, if granted enough time, deliver decent returns.
With some of the canons of traditional investing lying in tatters, money managers and their clients have been forced to think in a profoundly different way about how to deliver satisfactory performance.
“Given there’s so much uncertainty out there, there’s been a huge resurgence in either tailoring your benchmark or moving more to total return,” says Liz Ward, head of Europe at UBS Global Asset Management in London. “The majority of new mandates we’ve seen this year includes total-return investing. That will probably continue. Similarly, for benchmark-based investing, the lion’s share of new mandates is now against tailored indexes.”....