GLOBAL – The hiring and firing of investment managers by institutional investors in the UK and US can be a value-destroying activity, according to a report by global consultant Watson Wyatt.

The paper stated there is “room for improvement” on the part of institutional investors when it comes to decisions about appointing or terminating investment managers.

According to Watson Wyatt, institutional investors are too obsessed with past performance, and rely too heavily on brand names.

“Termination tends to follow underperformance, and performance tends to improve post-firing,” said the report.

A study on the same topic by the WM Company in the late 1990s and early 2000s also revealed that institutional investors “mis-timed” the relative returns cycle.

“Managers tend to be fired after periods of poor relative performance; managers with strong track records are hired but then tend to disappoint.

“In fact, within one to two years post-change, the new manager’s performance has typically fallen below the fired manager’s, whose performance has recovered.”

In reports today, Liontrust Asset Management investment director Jeremy Lang stated that the investment industry was heavily skewed towards performance. Furthermore, performance plays a pivotal role in the hiring and firing process.

According to Watson Wyatt, institutional investors should “resist acting in the short term and become long(er) term investors – both in terms of performance outcomes and in the saving of transition costs”.

The use of consultants during manager selections was found to result in “larger outperformance” due to a focus on qualitative research rather than purely past performance, said Watson Wyatt.