Some of the best insights about the management of U.S. pension assets come from outside the United States - from Toronto to be exact, and they are generated by a Canadian.
Toronto is where Keith Ambachtsheer conducts his analyses of cost-effectiveness of the management of U.S. pension funds.
Keith is president of KPA Advisory Services Inc., a consulting firm through which he provides his unique insights into pension management in the United States and Canada.
The firm also publishes The Ambachtsheer Letter, which each month brings erudite and truly original thinking to some aspect of pension fund management.
The Dec. 10 letter, for example, focused on the cost-effectiveness study and asked: What do funds with high cost-effectiveness ratings look like?
While Keith warned the results of the study are preliminary, because they are based on only three years of data from 77 funds, a portrait of a high value added, low excess cost (that is highly cost effective) fund has begun to appear.
First, there is little or no apparent correlation between performance and money spent. Keith's analysis showed funds with low excess costs (low relative to a standardized benchmark that corrects for uncontrollable factors such as fund size) were as likely to have excess returns (i.e. in excess of the returns their investment policies passively implemented should have returned) as were funds with high excess costs.
Those funds with high value added but low excess costs had higher amounts of internal management - both active and passive - and higher levels of passive management than the high value added but high excess cost funds. Funds with high value added but low excess costs also tended to have slightly lower equity exposures.
Their average size was substantially higher, while the median size was somewhat higher, suggesting size does have cost advantages.
Interestingly, only 28 funds out of 77 had high excess returns in both 1991 and 1992. And there is no evidence that private pension funds in the survey are more cost effective than public funds.
Clearly, this research into what characteristics and practices contribute to cost-efficient pension fund management will be extremely valuable in the long run to all pension funds and other institutional investment pools.
The lessons learned will no doubt apply in part to endowments and foundations, which have similar asset management structures.
And if more funds submit their data to the study, the quality of the research will improve.
Keith will be starting to gather 1993 data in March and any fund that wants to participate can contact him at (416) 369-0788.
There is no cost for participating, and any new funds joining the survey will receive a free analysis of where they stack up against the funds already in the universe - that is, how cost-effective their fund management is relative to others surveyed.