Cash Management: Benchmarking Isn’t Always the Answer

March 13, 2014
One company shows how a strategy of moving away from a benchmark outperforms staying with one.

Are managers able to perform to their fullest potential or do companies constrain them too much? Looking beyond the current benchmark orientation could lead to managers taking more meaningful bets. This was one discussion at a fall 2013 NeuGroup’s Treasury Investment Managers’ Peer Group meeting, where one member shared with other how his company has moved away from traditional benchmarks with a group of managers to encourage them to “think outside the benchmark.”

One of the first things this investment manager did was to make it a contest between managers. The idea was to get managers to take more meaningful bets and implement their best ideas. Over time, the company observed a reluctance of investment managers to express their views away from their benchmark. But the company wanted to shift the manager focus away from their benchmark and to market opportunities.

Control group
For one set of managers, the company took away the benchmark and instead gave them credit limitations and duration targets. The managers had the freedom to invest anywhere within these parameters and duration targets. In this case the duration band was 3 to 5 years, and credit was investment grade only. The company moved eight of their fifteen “core” managers into this new framework. Another set of managers kept the benchmark.

One worry was that the managers without the benchmark would all pile into the same idea. As it turns out, this hasn’t happened, although careful planning before choosing each manager to move into this “strategy” has helped. The TIMPG member noted that the recent choppy (not one-directional) market has really shown each manager’s unique strengths, so he does believe the end result has been more diversity.

Implementation and evaluation critical
Without a benchmark to measure risk, new risk metrics had to be reviewed. The presenting member noted that his company reviews the risk-adjusted return from each of the managers. Strong downside performance was also important in the evaluation. Each of the managers was then given a scorecard that showed where they fell in the investment lineup. Manager names and actual returns were confidential, but managers understood where they ranked. The member found that this strategy encouraged more dialogue with the managers, which turned out to be very positive.

Now three years after moving to this strategy and after careful evaluation, the company is pleased with the results, as the strategy has provided solid outperformance versus the managers still using the benchmark format and old benchmarks. The engagement level with the managers also has increased, as the competitive nature of the strategy has really motivated the managers. At the end of the day though, not all managers will thrive in this framework, so careful evaluation is necessary.

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