What If The Investment Industry Is Benchmarking The Wrong Things?

 

Investment management is built around benchmarking.  Fund managers compare themselves against indices. Advisers compare portfolios against peers. Research houses compare managers against categories. Clients compare returns against expectations.

Benchmarking is so deeply embedded in the industry that it is rarely questioned.

But what if the more useful question is not what the industry is good at, but what it is collectively bad at?

Behavioural economist Rory Sutherland has described a concept known as reverse benchmarking. Rather than asking how to become marginally better than competitors at the things they already do well, reverse benchmarking asks a different question:

What are competitors surprisingly poor at?

The answer may reveal opportunities that traditional benchmarking overlooks.

The investment industry is remarkably good at discussing performance, volatility, asset allocation and economic forecasts. There are thousands of articles, presentations and research papers dedicated to these topics.

Yet there are several areas where the industry remains surprisingly weak.

 

Explaining The Problem Before The Solution

Most investment presentations begin with the product.

The manager explains the process, the team, the philosophy and the performance record.

What is often missing is a clear explanation of the problem being solved.

For example, many retirees are told about diversification, but fewer are helped to understand sequencing risk. Many are shown long-term return assumptions, but fewer are shown how two portfolios with similar average returns can produce dramatically different retirement experiences.

Two retirees may begin with identical balances and achieve similar long-term average returns. Yet the order in which those returns occur can produce dramatically different outcomes.

Understanding the problem is often more valuable than understanding the product.

 

Behavioural Survivability

Investment professionals frequently discuss risk in statistical terms, while clients experience risk emotionally. The greatest threat to many retirement plans is not necessarily volatility itself, but the decisions made during periods of stress.

Investors rarely abandon portfolios because they have calculated a poor Sharpe ratio. They abandon portfolios because they become frightened, lose confidence or feel unable to continue.

Behavioural survivability remains one of the least discussed aspects of portfolio construction.

 

Adviser Education

The industry produces a vast amount of commentary, yet far less effort is devoted to creating genuine understanding. There is an important distinction between information and education.

Information tells advisers what happened. Education helps advisers understand why it matters.

The distinction may appear subtle, but it has significant consequences for how advice is delivered and how investors behave.

Helping Advisers Solve Client Problems

Many managers focus on explaining why their strategy is attractive. Fewer focus on helping advisers explain difficult concepts to clients.

Retirement risk, sequencing risk and behavioural decision-making are complex subjects. Advisers who can communicate these issues clearly are often better equipped to guide clients through uncertainty.

In this sense, education can be as valuable as investment management.

 

Benchmarking Products versus Benchmarking Outcomes

Most investment benchmarking compares products against products. Yet retirees do not experience products.  They experience outcomes.

A portfolio that outperforms a benchmark but causes an investor to abandon their plan may be technically successful but practically unsuccessful.  Conversely, a portfolio that helps an investor remain invested through uncertainty may achieve a more durable outcome even if it is not the highest-returning strategy in every market environment.

This distinction becomes particularly important in retirement, where behavioural decisions can have consequences that extend far beyond short-term performance.

 

Reverse Benchmarking in Practice

If the industry is already highly competitive in performance analysis, manager selection and market commentary, becoming marginally better in those areas may offer limited advantage.

However, becoming exceptional at helping advisers understand retirement risk, investor behaviour and portfolio resilience may create value that is far harder to replicate.  The greatest opportunities do not always lie where competition is strongest.

Sometimes they lie where attention is weakest.

 

A Different Question

The investment industry has become exceptionally good at measuring what is easy to measure.

Returns.

Volatility.

Rankings.

Yet many of the outcomes that matter most to investors—confidence, behavioural discipline, retirement sustainability and the ability to remain invested through uncertainty—remain far harder to benchmark.

In retirement investing, the industry's greatest blind spots may not be product design or market forecasting, but understanding how investors experience risk, uncertainty and the realities of living through a full market cycle.

Perhaps the most valuable opportunities in investment management are not found by becoming marginally better at what everyone else is already measuring.

Perhaps they are found by asking a different question:

What important problem is everyone else overlooking?

 

Gyrostat Perspective

We do not attempt to predict the market as it is.

We act on how risk is priced—consistently and without reliance on prediction.

 

Gyrostat Capital Management prepared this document and it is intended only for Australian residents who are wholesale clients (as defined in the Corporations Act 2001). To the extent any part may be perceived as financial product advice, it is general advice only and has been prepared without taking into account of the reader’s investment objectives, financial situation or needs. Anyone reading this report must obtain and rely upon their own independent advice and inquiries. Investors should consider the Product Disclosure Statement (PDS) relevant to the Fund before making any decision to acquire, continue to hold or dispose of units in the Fund. You should also consult a licensed financial adviser before making an investment decision in relation to the Fund. One Managed Investment Funds Limited ACN 117 400 987 AFSL 297042, is the responsible entity of the Fund but did not prepare the information contained in this document. While OMIFL has no reason to believe that the information is inaccurate, the truth or accuracy of the information in this document cannot be warranted or guaranteed.