Bond benchmarks are "structurally flawed", and bond performance targets for fund managers should instead be referenced to cash, according to Standard Life Investments head of multi-asset investing and fixed income Euan Munro.
Munro, who is speaking at the Major Market Player’s Conference on the Gold Coast today, said fund managers could become "blind" to the risks embedded in bond benchmarks in a negative bond return environment.
He added that performance targets referenced to cash would represent a better way to gauge a fund manager’s skill.
"Despite cash in itself not being a perfect risk-free rate, it is at least a good comparison for investors who have the option of putting money in the bank or entrusting it to a fund manager," Munro said.
Active investment managers still have plenty of opportunities in the bond market to achieve a decent level of return while taking on a relatively small amount of risk, he said.
"Provided investors have the will to set return and risk targets for bond managers in absolute terms, the bond manager can maximise the outcome by creating an investment strategy that delivers investment returns for the relevant levels of risk," Munro said.
