LONDON — Large U.K. pension plans are using behavioral finance analysis to help them select money managers.
Both the £3.4 billion London Pensions Fund Authority ($6.3 billion) and the £4 billion Merseyside Pension Fund, Liverpool, have used a system called Behavioral Performance Strategies to help them select money managers from consultants' shortlists.
BPS analyzes manager portfolio holdings and trading activity over a certain period in order to understand the source of a manager's performance, said Rick Di Mascio, chief executive of Inalytics Ltd., London, which operates BPS.
In March, Merseyside used BPS in conjunction with manager search specialists bfinance, London, to find a European equity manager, said Paddy Dowdall, investment monitoring officer at the pension plan. Money managers were asked to provide trading data for BPS to analyze. The £100 million mandate was eventually awarded to JPMorgan Asset Management, London, in September.
"We feel a lot more confidence in the process behind this appointment," said Mr. Dowdall. "The more involvement you have and the more information available, the more confidence you have in the decision that is made."
The BPS data shed an interesting perspective on managers' convictions, said Mr. Dowdall. He was intrigued that money managers are far better at managing the stocks they feel positive about.
"All managers, including underperforming firms, attained positive performance from overweight stocks whilst neutral and underweight positions often acted as a drag on performance even for managers who outperformed," he said.
"The data also show that fund managers tend to have very good skills at buying and less at selling," he added.
According to Mr. Di Mascio, this "disposition effect", where fund managers sell their winning stocks and continue to hold poorly performing ones, can reduce performance by as much as 200 basis points a year.