Serious Money: The advent of the euro was thought likely to have many profound effects on domestic financial markets. Some commentators argued that the only factor that determines whether or not an asset should be classified as domestic is its currency denomination.

Anything that was quoted in Irish pounds was, therefore, a domestic asset. Anything else was classed as foreign. And the only reason to have a "high" exposure to domestic relative to foreign assets is the currency problem.

Ultimately, the end investor - ordinary savers - in Irish-based investment funds wants to be paid in the domestic currency. Hence, taking on foreign assets means taking on another large source of risk - currency - as well as adopting the risk inherent in the underlying investment.

Not only can the foreign investment go down in price, we can also experience the joys of an additional decline, in domestic currency terms, thanks to adverse exchange rate movements.

The upshot of all of this is that the investment industry tended to produce benchmarks for fund managers that encouraged very high weightings for domestic assets. "Home bias", as it became known in the academic finance literature, was by no means exclusively driven by currency decisions, but they were (and still are) a significant factor.

Nor was this phenomenon an exclusively Irish affair. Home bias in equity portfolios is thought to be most acute in the US, where historically, investors have stubbornly refused to avail of the proven benefits of international diversification.

While currency should, in practice, be far less of a driver of asset allocation decisions, it is ironic that diversification may actually be showing signs of starting to happen in the US, thanks to the current weakness of the dollar.

Logically, the adoption of the euro should have changed the definition of "domestic" assets in a profound way and benchmark weightings should have altered accordingly.

For example, if a European equity fund previously had a benchmark weight of, say, 30 per cent in Irish equities, an appropriate new weight, assuming the fund is exposed to EMU countries only, would be nearer 1 per cent. More generally, in a global equity portfolio, the Irish benchmark equity weighting should be tiny.

Some benchmarks did change in this radical fashion but not all. Evidence suggests that benchmarks have been relatively slow to adapt to the new currency regime. Actual weightings of Irish equities in domestic equity portfolios remain relatively high. This might have happened as a result of a big bet by asset managers, but I doubt it. It is possible, though unlikely, that domestic benchmarks have fallen, but asset managers have chosen to significantly "overweight" Irish equities because of a belief that they were likely to outperform.

Inevitably, the finger of suspicion points firmly at old-fashioned inertia. All sides of the industry seem to be comfortable with a relatively slow pace of change. And that must, presumably, include the ultimate investor - individual savers - as well as fund managers and consultants. If the customer had demanded faster change, he would have got it.

All of this is part of the wider discussion over the tyranny of benchmarks and the importance of asset allocation. Fashions can change rapidly in the benchmarking industry, but the core principle of trying to beat a well-known index like the Iseq, FTSE or MSCI retains a remarkably firm grip on a large part of the business. Simplicity has its attractions, even when it leads to bad outcomes.

Ultimately, performance has to be measured relative to something and the industry likes that something to be visible, simple and impossible to manipulate. Even hedge funds and other alternative forms of investment that are supposed to comprise the "absolute returns" business sometimes find themselves being compared to something else.

The two key decisions facing any investor are, first, when will he need the money and, second, who to pay to manage it. The first decision will dictate his asset allocation: the longer he can wait for his money, the more he should put into equities.

Anyone saving for a pension who is currently in their 20s should, in my view, have a 100 per cent allocation to equities. People in their 50s, particularly anyone thinking of early retirement, should have most or all of their money in bonds.

The second decision involves giving someone else the responsibility of choosing which equities or bonds.

This is a phenomenally complex decision, but one that at the end of the day comes down to past performance and costs. Despite all the caveats about past performance offering no guide to the future, one of the few pieces of hard evidence that we have at our disposal is about actual investment returns.

Evidence about returns, particularly those achieved over the long haul, will tell us a lot about a money manager.

In the new world of rapid growth in hedge funds and the relative decline of the traditional asset manager, a new layer of complexity has been added to the manager selection decision.

The growth of hedge funds and other newer types of manager can be seen as an attempt to exploit the market inefficiencies created by things like inappropriate benchmarking. If you force people to invest, say, in domestic equities solely because of the benchmark - rather than their intrinsic investment attractions - pricing anomalies will exist.

Put simply, money has been left on the table and the hedge funds have come along to pick it up.

Hence, one "new" question to be asked of the prospective money manager is what he thinks about all of this. In a sense, find out if he is a dinosaur.

If, for example, there is evidence that performance is trending down but investment behaviour is not, ask why. Many of the old techniques of investing - adherence to the disciplines of value investing, for example - still hold true, but many do not. Fund managers should be able to offer wholly convincing reasons for recent underperformance, why they think it is temporary and what they are doing to respond to the latest developments in the industry.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.