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Active management boosts performance by 16 basis points, study finds

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Active management has helped pension funds outperform the market but only by 16 basis points after costs, according to an in-depth study spanning more than two decades.

The survey, conducted by CEM Benchmarking, estimated that there was a gross added value of 58bps for pension funds if they actively managed their assets rather than tracking a benchmark.

The survey was backed by figures from Europe’s largest asset owner, the Norwegian Government Pension Fund Global, which claimed a 0.25 percentage point outperformance since inception.

The firm based its findings on annual survey results dating back to 1992 that captured the performance of more than 1,000 corporate and public pension funds over its 21-year run, with the 2013 sample of 335 schemes managing $6.5trn (€4.7trn) in assets.

Alexander Beath, senior research analyst at the firm and the study’s author, noted that pension investors had been “put under the microscope” by regulators since the onset of the financial crisis.

“This requires them to justify their investment costs and practices, and this confirms what those in the industry know,” he said. “Investing in investing has paid off.”

However, Beath also acknowledged the “small” outperformance of 16bps once the cost of active management had been taken into account.

“While [the outperformance] is great news for our clients who need to justify active investing in the face of efficient market adherents, what is really interesting is finding out why they are able to tilt the table in their favour and add value,” he said.

The survey found that pension funds increased their net value by 7.6bps for every tenfold increase in assets, and that there was a 22.1bps increase in net value for pension funds that managed assets internally.

“While average value added has been positive, individual fund performance around the average varies significantly, with standard deviations of 267bps gross and 265bps net.”

The findings come after Swedish buffer fund AP4 credited active management with a SEK1.4bn (€147m) outperformance in 2014.

Similarly, the Norwegian Government Pension Fund recently defended its approach to management after reports in local newspaper Dagens Næringsliv alleged Norges Bank Investment Management failed to achieve an outperformance compared with its benchmark since 1998.

In a response to the article, NBIM’s chief risk officer Dag Huse said: “To invest is to make choices. Looking back, we will see that some choices were good, and that some were less fortunate.

“What counts is that we as a fund manager improve the trade-off between return and risk in the long run.”

NBIM argued that its approach to management had seen a 0.25% outperformance since the fund’s inception in 1998.

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