Stocktake: Pension funds hire the wrong managers

New study finds funds ignore advice about past performance

This proves costly for pension fund investors, as hired managers then underperform over the next three years. Photograph: iStock

This proves costly for pension fund investors, as hired managers then underperform over the next three years. Photograph: iStock

 

Pension funds are hopeless when it comes to choosing investment managers.

That’s according to a new study, Choosing Investment Managers, which examined almost 7,000 decisions made by more than 2,000 global pension funds that controlled $1.6 trillion in assets.

It finds funds ignore the advice about past performance being no guide to future returns and choose to fire managers with a poor track record over the previous one to three years and hire managers who have done well over the same period.

This proves costly for pension fund investors, as hired managers then underperform over the next three years.

This tendency to choose yesterday’s winners is ubiquitous – it’s evident in both equity and bond pension plans, in both US and non-US markets, and in both small (assets under $100 million) and large (assets over $100 million) pension plans.

However, consultants don’t focus solely on past returns; if you have a personal relationship with the consultant, you’re more likely to get hired.

In other words, notes investment blogger Joachim Klement, pension funds and consultants “hire their friends or people with a good past track record. Everything else doesn’t matter – no matter how much they pretend it does”.

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