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Sector vs Factor-based Benchmark Selection

Same, same, but different?

Nicolas Rabener
10 min read
12 Sep 2022

SUMMARY

  • Manager-selected benchmarks are suboptimal as they are not free of conflict of interests
  • Investors can use sectors to identify more appropriate benchmarks
  • However, this ignores factors, which are better at explaining investment returns

INTRODUCTION

In our last research article (read Mirror, Mirror on the Wall, which is the fairest Benchmark of them All?) we highlighted that investors can use factor exposure analysis to identify and select the most appropriate benchmark for a mutual fund, or even a portfolio with diverse assets.

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