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The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Hossein Kazemi, Garry B. Crowder, Thomas Schneeweis

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CHAPTER 8
Return and Risk Differences among Similar Asset Class Benchmarks
The use of historical data to demonstrate what the performance of a portfolio could have been if certain investment decisions had been made has been termed “pro forma performance.” Usually a manager will look at the return of certain published benchmark indices; conclude that these benchmarks reflect the strategy he would have invested in over some period; package them together; and then say to the potential investor: This would have been your performance had you invested with me. Needless to say, this type of performance data is ripe with hazards and the Securities and Exchange Commission (SEC) has strict rules regarding its distribution and marketing. Once you move beyond the obvious fact that there is a manifold difference between decision making where there is no risk and decision making where reputations and significant pools of money are at stake, there is the question of whether the indices or investment proxies actually reflect realistic investable returns or values. This chapter deals with the latter issue and leaves the moral hazards to the regulators and an investor’s common sense.
One of the principal concerns in the application of multi-asset management is the degree to which the potential advantages shown in the asset allocation designed portfolio can be transferred to the investor. Where the design is based on investment benchmarks, the question is whether the benchmarks are investable in ...

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