EDINBURGH - Pension funds are lousy at changing money managers, new research by The WM Co. confirms.
The Edinburgh-based performance measurer found U.K. pension funds that appointed new balanced managers on average underperformed by more than 0.5% a year those funds that had made no changes.
The evidence strongly suggests funds relied too much on past performance in picking managers.
WM officials analyzed manager changes made from January 1992 through December 1996 by 368 pension funds, whose assets totaled 285 billion pounds ($456 billion).
Only 35% of the funds surveyed switched managers during the five-year period. Gordon Bagot, research and consultancy director at WM and who conducted the study , found the average pension fund is likely to retain the same managers for around 10 years, much longer than generally believed.
The best returns over the five-year period were achieved by pension funds using some form of balanced management.
Where no changes in managers were made, funds using multiple balanced managers earned an average annualized 14.6% return. In comparison, funds that stuck with only one balanced manager returned 14.5%; those with specialist structures, 14.2%; and funds employing a combination of balanced and specialist managers, 14.5%.
Where a change in manager was made, use of a sole balanced manager led the pack, at 14.6%; followed by the balanced/specialist combination, 14.5%; specialist structure, 14.2%; and multiple balanced managers, 13.8%.
U.K. pension funds have been shifting slowly toward specialist manager structures, but WM officials believe those funds might have suffered worse returns.
"Funds which have moved away from the single balanced manager approach may have achieved greater diversification but, in straight financial terms, they received lower returns overall," said Mr. Bagot in a release.
WM's survey also highlighted concerns over concentration of business into too few hands.
While 57 managers won new mandates, nearly three-fifths of active accounts were awarded to only four managers. Passive managers picked up 13% of new mandates.
Dismissals were spread more evenly. While 58 managers lost at least one pension client during the five-year period, the four managers most affected had accounted for 36% of total losses.