Internal pension fund managers have better investment results than external managers, according to an analysis by performance measurer WM Company. From a study of 28 internally-managed pension funds in the UK managing £158bn(E256bn), the findings show that these funds have lower risk, resulting in higher average total fund returns.
The majority of internal funds managed their UK equities on an active basis and produced a tighter range and a return that was on average around 0.3% pa, over rolling three and five-year periods. Similar results apply for North American equities, while for European equities the outperformance was 0.2% pa, again showing a “significantly lower dispersion of returns”, according to Edinburgh-based WM. But in the case of Japan equities and UK bonds, external managers’ produced better avearge returns.
On average the number of active UK stocks held internally was 212 was considerably higher than a typical externally managed portfolio, says the study. But the internal funds’ activity was much lower than for an extedrnal one. Average portfolio change was 31% for internal UK equities, compared with 53% externally, while for European equities the ratios were 74% as against 85%. For UK bonds the internal rate of change was at 82% compared with 141%.
“Lower trading activity leads to lower costs,” says WM, adding “based on a similar level of manager skill this would translate into better performance”. As funds should be concerned with their net of fees returns, this give internally managed funds a strong advantage due to their lower cost base, it notes.
WM also points out that internal funds have a lower risk profile with an average tracking error of 1.6% pa, which is equivalent to the 75th percentile for external funds. This puts internal funds in the lowest quartile of riskiness.
These funds represent 25% of the UK pension fund market, compared with 46% 15 years ago.Over 80% of these funds are in the ‘supermature’ group, as over 60% of members are deferreds and pensioners.