WM challenges manager replacement convention

UK/EUROPE - Replacing an underperforming pension fund manager usually ends in disappointment for most pension funds, according to new research produced by the WM Company.

In a research document entitled “Performance based Strategies for Changing Manager” WM says it used historical data to examine the performance impact of three separate manager selection strategies: sell, low, buy high - sell, high, buy low – or remain with same manager.

Using its database of manager performance, WM found that the “apparently perverse” strategy of exchanging an outperforming manager in favour of one that has exhibited three-years of relative underperformance was more beneficial in performance terms than the current preference of hiring an outperforming manager.

On the basis of the rules devised for the study and assuming a 1% cost in switching between managers, WM found that the ‘sell at the top, buy at the bottom’ strategy outperformed by 1% per annum.

Alastair MacDougall, WM executive director comments: “Most manager replacements fall into the “sell low, buy high, category.” i.e. managers who have been performing poorly are replaced by one who has had a good run.
“We have demonstrated that this strategy, which is standard industry practice, generally leads to underperformance of appropriate benchmarks. Changing an investment manager is one of the most important decisions which pension fund trustees are liable to make and most are unsuccessful.”

The WM work is based on the returns of seventeen investment houses and follows on from a previous study “Does Changing Manager Improve Performance? - Latest Evidence”, published in October 2001.

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