EUROPE - Institutional investors are paying for active management, but getting de facto benchmark huggers, according to a recent study.

The report - conducted by Germany's Universal Investment and the WHU Otto Beisheim School of Management - covered the 52 master funds and 431 sub funds that Universal had under administration for institutional clients between 2003 and 2008.

Participants in the study aimed to analyse the -0.29% annual underperformance reported by the master funds over the five-year period. On the sub-fund level, the annual underperformance was -0.31%.

The study found an average tracking error of 1.3% for the master funds and more than 2% for the sub funds.

Lutz Johanning, head of empirical capital market research at the WHU, said investors were essentially "getting structures sticking very closely to the benchmark" while paying for "so-called 'active' mandates".

He added: "This is a call for investors to set higher tracking errors for their active managers."

Lutz said there was evidence for increased return potential in active investment decisions, but that these were too little used, even by active managers.

The study also found the tactical asset allocation in sub funds did "more harm than good" and that stock picking had a return potential four times greater.

The study claimed market timing in the sub-fund sample had been responsible for more than 60% of the master funds' underperformance and concluded that active managers should not apply market timing.