EUROPE - Pension funds destroy value when selecting and deselecting managers solely based on performance, according to Edouard Stucki, senior investment consultant at Watson Wyatt.

Speaking at the Fund Manager Selection 2007 conference in Zurich today, Stucki warned that when pension funds use performance as the key factor, fund managers selection turns into a "dog and pony show or beauty parade".

Institutional investors tend to subtract value when changing managers, as they are "mesmerised" by past performance, and smaller investors tend to suffer more value loss, he said.

According to Stucki, the stronger the pre-hiring relative returns are, the weaker the post-hiring relative returns will be.

Furthermore, the larger the plan sponsor, the stronger the post hiring returns will be, and the larger the mandate, the weaker the post-hiring returns, he added.

He warned: "The mindset I frequently observe when pension funds select or deselect managers is that they see it as a 'let's do it, let's get it over with' administrative exercise constrained by luck. It is not seen as an investment decision linked to delivering excess returns."

He added: "There is a lot of statistical analysis of past performance, presented to pension fund boards or senior management who don't understand it; too much of the decision is based on both the final presentation and current performance. Investment managers understand this game very well."

He called pension funds to improve their fiduciary skills, "directly, through education, or indirectly, through delegation," and to look at the longer term.

Also speaking at the conference, Antony John, managing director at Investment Manager Selection, agreed with Stucki, arguing that institutional investors need to "move away from short-termism". John concluded: "Judgment across the economic cycle with knowledge is essential."