Study: 'Shortlists' influence pension funds' asset manager expectations

Pension funds have higher return expectations of asset managers frequently shortlisted by consultancies, research by Saïd Business School has found.

The research, conducted jointly by the University of Connecticut and the University of Oxford-based business school, found that past performance and soft investment factors also influenced asset owners’ decisions to award new mandates, despite scant evidence of their ability to predict future performance.

The study, examining 13 years of US equity performance data, found that past performance was only indicative of future returns over “very short” periods.

“Consultants’ recommendations, once aggregated at the manager level, also seem largely unrelated to performance,” authors Howard Jones and Jose Vincente Martinez found.

However, they added: “Asset managers frequently short-listed [sic] by investment consultants are perceived as more likely to outperform other asset managers.”

The paper builds on 2013 research by Jones and Martinez that found no evidence of recommendations by consultants adding value to pension funds, with the current paper examining the motivation of asset owners for nevertheless accepting the recommendation.

The paper found that pension funds were “ignoring the wealth of evidence” that showed there was no direct link between an asset managers’ past performance and its ability to generate future returns.

Despite this, it also found that past performance was a “much more important driver of flows” than any future return expectations.

The authors argued that the most likely explanation for such behaviour was that the fiduciaries involved in any decision-making were opting to use the “most observable and verifiable” data available to them, even if the fiduciaries believe they know better.

“Trustees may attach unwarranted weight to this tangible piece of information (or non-information) simply because it is observable by the people they are appointed by or answerable to,” they said.

Furthermore, decisions to appoint future managers were also based on service factors – such as a company’s use of informal meetings or hiring a relationship manager perceived as capable.

“This is perhaps because service factors are read by institutional investors as being informative about general business practices of the asset manager, which might also be reflected in expected future performance,” the paper said. 

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