The Importance of an Absolute Return Focus

At Balentine, we espouse focusing on an absolute return benchmark over a full market cycle to measure investment results. After all, as we counsel clients, “you cannot eat relative returns.” The Barron’s article “Chasing Goals Rather than Benchmarks” discusses this shift in thinking. Citing “the industry’s efforts to reframe the conversation with investor away from how much a fund beats a given benchmark toward whether the fund is meeting a particular goal” shines the light on investment strategies driven by an absolute return target, rather than letting an over-focus on short-term relative return benchmarks influence investment decisions.

Indeed, as we have long stated, the mind-numbing attention on short-term relativity and “keeping up with the Joneses” often drives the wrong behavior. Instead, in our view, the most important thing is to assess what is realistically possible after inflation and fees given an investor’s starting point given their tolerance for drawdown risk and their liquidity needs. By focusing on what is possible and using an absolute return benchmark to set the goal, the purpose of the secondary benchmark becomes not a measure of returns to “beat the market every month or quarter.” Instead it acts as a measure of the risk-adjusted opportunity set – are we making asset allocation and implementation decisions to reach that goal taking the least amount of risk possible to reduce the range of possible outcomes? This helps clients frame their progress to plan of reaching their goals in a risk-adjusted absolute return sense.

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