Pension funds hire money managers based on evidence of past performance and on consultant recommendations, so they can shift the blame if things go wrong, new research states.
Howard Jones, senior research fellow in finance at Said Business School at the University of Oxford, England, and Jose Martinez, assistant professor of the University of Connecticut School of Business, Storrs, analyzed 13 years of survey data from Greenwich Associates.
Mr. Jones said in a telephone interview that the latest research, “Institutional investor expectations, manager performance, and fund flows,” follows earlier work that found no evidence that investment consultants' recommendations added value. The researchers then set out to find out why pension funds allocate assets to money managers that have done well in the past, and ones that are recommended by investment consultants, despite these two factors having little predictive power.
“We say that this is evidence of an agency problem — we have plan sponsors and (others) that are making decisions on behalf of someone else, and they may have been making those decisions more in their own career interest than” for those for whom they are making decisions, Mr. Jones said.
“If (a sponsor) wanted to defend a decision, it would be easier to do so if pointing to tangible variables than to say "I formed my expectations in a way ... and things went wrong,'” Mr. Jones said. “The consultants are used as human shields, in case a decision turns bad. Plan sponsors know that, if they follow past performance and consultants and things go bad, then they are going to be in good company.”