When building an investment portfolio it is better to start out from a benchmark-agnostic position and to actively manage equity risk, according to State Street Global Advisers (SSgA).
Both of those outcomes are more about the structure of a portfolio rather than the skill of the managers, according to Lochiel Crafter, head of investment, Asia Pacific at SSgA.
"Managers cluster around the benchmark; there is not a lot of outperformance and this is not generating the sorts of returns investors want," Mr Crafter said.
Hugging a benchmark is one of three key inefficiencies in multi-manager portfolios, he said, along with redundancy between managers as well as inefficiency between stock holdings between managers.
If you have manager X and manager Y, they may both be around the index, "but on average you'll probably end up with index performance and you'll be paying for it," he said.
Further, managers are sometimes overweight and underweight a particular stock, and if they buy and sell to each other, an investor who is a client of both can end up paying for that, he said.
The other critical factor is to manage equity risk, according to Mr Crafter.
In the total return space, the risk is similar to or greater than market - so it costs you greater risk to get the same return, he said.
"What really matters to investors is, 'Are we managing our total risk?'," he said. "If you want to build a better managed fund you need to manage risk better."
He said that in a typical balanced fund, greater than 95 per cent of the total risk comes from equities - "so we should be managing equity risk more effectively".
"In an environment where people are relying on market return for income and have to draw money out to live on, they can't get that money back [once it is lost through poor performance]," he said.
Managing risk is particularly important in the area of retirement incomes, Mr Crafter added.
In response, SSgA has announced an active global equities solution for local investors that focuses on investors' financial goals rather than a traditional market capitalisation index.
SSgA said its Global Managed Volatility Alpha (Global MVA) strategy, launched more than four years ago in the United States, will now be available in Australia and accessible through superannuation funds, the financial advice industry and investment platforms, and will be available via both segregated mandates and a managed investment scheme structure.
