Institutional investors would be just as successful by randomly picking U.S. equity managers than by taking the recommendations of investment consultants, new research from Oxford University's Saïd Business School shows.
Two complementary research papers released Aug. 27 and Sept. 17 by the Oxford, England-based school argue that, although pension funds and other institutional investors rely heavily on consultants when picking U.S. equity managers, the consultants add no value.
Andrew Kirton, Mercer's London-based global head of investment consulting, conceded the institutional investment consulting world is not as transparent as the retail world. Still, he believes the school's research is “a bit sensationalistic” and “uninformed,” as it only draws conclusions from examining U.S. equities, “the hardest asset class (in which) to find alpha” and add value.
Howard Jones, a senior research fellow at the Saïd Business School and co-author of the reports, noted in an interview that consultants are not merely “return-chasing” when they form their recommendations, basing them on a wide array of criteria. “We think if there was more transparency of their past recommendations, then a greater separation would be possible between those with better and worse track records,” Mr. Jones said.
“We're just trying to shine a bit of light on a small, but important, part of the market.”
Based on the analysis of 29 investment consulting firms — accounting for more than 90% of the market — U.S. equity managers recommended by consultants underperformed others not recommended by consultants by 1.1% per year between 1999 and 2011 on an equal-weighted basis.
Jose Martinez, a lecturer in finance and a co-author of the papers, said the researchers got data from Greenwich Associates, Stamford, Conn., on what money manager strategies consultants recommend. They then gathered performance data on those managers' strategies from eVestment LLC, Marietta, Ga., and compared it to performance data from eVestment on strategies not recommended by consultants.
“Consultant recommendations don't seem to have any significant predictive power as to which funds are going to do better than others,” Mr. Jones said.
Investment consultants had more than $13 trillion of U.S. institutional assets under advisement as of June 30, 2011, according to the school's research, with 82% of public defined benefit and defined contribution plan sponsors and half of corporate DB and DC sponsors using consultants. On a global basis, consultants advised on $25 trillion of assets.