Beating benchmarks - A stockpicker's reality.

The inability of active managers to consistently outperform capitalization- weighted benchmarks can be explained by a mismatch between those benchmarks and the underlying nature of active management. The authors show that this mismatch cannot be effectively addressed either through macro-level risk c ontrols or through improved stock selection. They develop a new approach to risk management that emphasizes diversification at the individual stock le vel and offers significant improvements in risk-return efficiency and portf olio manager consistency; this new approach to risk management is also sign ificantly easier to incorporate into a bottom-up investment process. Plan s ponsors can further improve the value of active management through combinat ions of new, more portfolio manager-friendly active manager benchmarks and completion indexes that move the overall allocations back to their original capitalization-weighted benchmarks.