Data suggest schemes would rather fail conventionally than break from herd

In the UK, a survey last year by the National Association of Pension Funds found 42 per cent of schemes rated their consultant’s ability to pick managers as “fairly good”, with 17 per cent valuing it less.

The report published this week by the Saïd Business School at the University of Oxford compared US pension funds’ expectations of asset manager performance, actual manager performance and investment consultants’ recommendations.

The survey of 781 US-based pension funds and consultants asked how they each rated their asset managers using the same standards for each group, concluding that both past performance and consultant recommendations inform funds’ expectations of future performance.

Managers considered to be in the top quarter of past performers had a 37 percentile greater future performance expectation than those in the bottom quarter.

Co-author of the report, Saïd Business School’s Dr Howard Jones said its recommendations could well be extended to UK pension funds. Scheme investors were likely to employ these methods regardless of their ineffectiveness in order to protect careers and reputation, he said.

“If anything goes wrong in their selection of asset managers it is much easier to say that they followed past performance and consultant recommendations,” he said. “If enough people get it wrong at the same time then you won’t get singled out for making the same mistake.”

Consultant influence is key in this trend, Jones said. “The very concentrated nature of the investment consultant industry is in itself a problem, because it gives the leading investment consultants representative power that is out of proportion to their added value,” Jones said.

Simeon Willis, principal consultant at KPMG, said dissatisfaction among UK pension funds could be a result of a focus on outperformance as an indicator of success.

“If people are being judged on their ability to select winners that is very difficult to do and luck plays a large part,” he said.

Alan Collins, a director at consultancy Spence & Partners also warned of using outperformance as a sole criterion. “It can lead to a false assessment of whether a manager is doing what asset managers are employed to do,” he said.

Professional trustee company PTL’s managing director Richard Butcher said a more effective way of measuring an asset manager’s success is by giving them targets tailored to the needs of an individual scheme.

“The danger of setting a generic benchmark return is they will then compete against the benchmark rather than against your return objective,” he said.