Veritas propter investigationem [Truth through research]
TitlePicking winners? Investment consultants' recommendations of fund managers (2013)
AuthorsTim Jenkinson
 Howard Jones
 Jose Vicente-Martinez
InstitutionUniversity of Oxford
TopicsInvestment performance
 Fiduciary issues
 Governance issues
CountryUnited States
Date Published2013
Date posted on PR12 Aug 2014
Jenkinson, T Jones, H Vicente-Martinez, J, (2013). Picking winners? Investment consultants' recommendations of fund managers (2013) University of Oxford,

PensionReforms’ summary and comments

Pension schemes and financial service providers usually look to investment experts when deciding on their investment strategy – what sectors to invest the assets in and what particular products to use within those sectors.


A US report suggests that investment consultants do not earn their keep:

“Using survey data from consultants with a combined share of 91% of the U.S. investment consulting market, we analyze these consultants’ recommendations of U.S. active equity products over a 13 year period, and we examine the drivers, the impact, and the accuracy of these recommendations.”


The consultants’ recommendations are usually based on past performance but “non-performance attributes” also drive the recommendations.  Those play “a large and significant effect on institutional asset allocation”.  The results of all that?


“…we find no evidence that consultants’ recommendations add value to plan sponsors.  On an equal-weighted basis, the performance of recommended funds is significantly worse than that of non-recommended funds, while on a value-weighted basis the performance is mixed, and the recommended and non-recommended products do not perform significantly differently from each other.”


Consultant-driven bias towards “large products which perform worse” do not explain this result since, after allowing for different fund sizes “…we find that recommended products still fail consistently to outperform non-recommended products.  The same result holds when we adjust for possible backfill bias.”


That’s all before fees – allowing for both the product’s and the consultant’s fees “…their failure to add value becomes more pronounced.”


So why do providers put up with this?


One possible reason is handholding that helps providers to explain what’s happening to their members/investors but that cannot be a sufficient explanation.


“Assuming plan sponsors knew that they were not being rewarded for following consultants’ recommendations, one possible reason for doing so is that plan sponsors hide behind consultants’ recommendations when they have to account for their decisions.”


In other words, the consultant provides a type of insurance for plan sponsors against the ‘headline risk’.  That comes at quite a cost.


The report notes the difficulty that providers have in measuring the effectiveness of consultants:

“While fund managers testify to the rigor with which investment consultants scrutinize their performance, and measure the effectiveness of their decisions, investment consultants themselves are shy of disclosing the sort of information which would allow plan sponsors, or any outsider, to measure their own performance.”


This means that providers are probably “making appointments partly blind”.


“An obvious policy response by regulators, or a market response by plan sponsors, is to require full disclosure of consultants’ past recommendations so that such decisions are better informed and, as a consequence, their assets more efficiently allocated.”


PensionReforms suggests that this is easier said than done.  No two plan sponsors will have the same liability profile unless, for example, they are selling vanilla products into a retail market.  Even then, it would not be easy to tease out properly comparable portfolios.  Comparisons can be made only between particular asset categories – cash, local bonds, local shares - and there are any number of possible sub-categories that might need to be separated.


If sponsors adopted ‘passive’ or ‘index-tracker’ strategies, comparisons would be easier as between the products of different sponsors.


PensionReforms thinks that plan sponsors should fix this issue.  Regulators may need to be called on for retail products but wholesale purchasers should understand what’s going on.  That is their responsibility after all. (File size 428 KB; 47 pp) 693