Pension funds should choose specialists, says report

Pie_chartAsset managers that focus on a single or small number of asset classes are better at generating alpha returns for UK pension schemes than managers that invest across a range of

assets, so-called balanced managers, according to a 20-year study by Cass Research.

UK equity specialists generated an average post-fee alpha return of 35 basis points a year, found the study, while the average balanced manager generated a negative alpha return of -54 basis points.

Improved performance can also be achieved by employing multiple managers in place of a single balanced or specialist manager.

“Pension funds which switched from employing a single specialist to multiple specialists increased average performance by 131 basis points,” said Professor David Blake, who co-wrote the study.

“Switching from single balanced to multiple balanced management led to a 63 basis point increase in performance. In both cases, fees increased by just three basis points.”

The performance gains are so great that they more than compensate for problems associated with organising multiple managers, such as “diversification loss”, when multiple managers do not diversify as effectively as a single manager would. Multiple managers are also less good at market-timing strategies.

“Our findings suggest that decentralisation actually improves performance sufficiently to compensate for the coordination problems that result,” said Professor Ian Tonks, another co-author.

©2012 funds europe