UK - Pension funds in the UK run by specialist managers produce far higher returns than those using balanced managers, and shifting to multiple competing managers has paid off, a new study shows.
Specialist fund managers focusing on just one or a few asset classes were better at picking stocks than balanced managers focusing on a wide range of asset classes, the 20-year study to be published in the Journal of Finance revealed.
Professor David Blake, co-author of the report, said: “UK equity specialists generated an annual average, post-fee alpha of 35 basis points, whereas the average balanced manager generated a negative alpha of -54bps.”
This superior performance of specialist fund managers was most clear in UK equities - the main asset class for UK pension funds, the authors found.
The shift in the UK pension industry towards using multiple competing managers and away from single fund managers has led to a big hike in performance, even after accounting for increased fees, they found.
“Pension funds that switched from employing a single specialist to multiple specialists increased average performance by 131bps,” said Blake, who is director of the Pensions Institute at Cass Business School in London.
“Switching from single balanced to multiple balanced management led to a 63bps increase in performance,” he said.
“In both cases, fees increased by just 3bps.”
Even though changing to a range of predominantly specialist managers from just one meant higher fees for the sponsor, the increase in pre-fee returns more than compensated for this, he said.
Blake said: “In UK equities, we find that the average excess return generated by a fund in the year prior to the switch to multiple managers was -53bps, while the year following it was a positive 9bps.”
Using multiple managers normally led to a diversification loss because the individual managers would not account for the correlation of their own portfolio returns with those of the other managers, said another co-author of the study, professor Ian Tonks.
Market timing strategies were also more difficult to coordinate, he said.
But despite this, the shift to multiple managers still paid off for pension funds.
“Our findings suggest that decentralisation actually improves performance sufficiently to compensate for the coordination problems that result,” Tonks said.
“The shift to decentralised management can, therefore, be interpreted as rational, since it offers funds with growing assets under management a path for reducing the effects of scale-diseconomies.”
Moving towards decentralisation allowed a pension fund to exploit the increased skills of specialist managers, and benefit from competitive pressures when several managers were used, he said.