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U.K. consultant manager recommendations not delivering outperformance – paper

Analysis of investment consultant-recommended strategies suggests that, on average, they do not outperform benchmarks or non-recommended strategies, finds the U.K.'s Competition and Markets Authority.

In a working paper outlining the outcome of quantitative analysis to test consultants' money manager strategy recommendations, the CMA said it had found no evidence to date that, net of fees, buy-rated strategies outperform their respective benchmarks and unrated funds "to a statistically significant extent on average."

The analysis, which forms part of the CMA's assessment of whether consultants are providing value for money in relation to the quality of their services, said all investment consultants' "analysis we have reviewed has claimed that, on average, 'recommended' products outperform their respective benchmarks."

However, the CMA said the empirical analysis it conducted "found that this is only the case on a gross of asset management fees basis." The CMA's quantitative analysis does not cover all investment consultant-recommended strategies, only considering the performance of actively managed strategies in an eVestment database.

The CMA noted that the provision of manager recommendations is one of a number of services offered by consultants. However, "manager recommendations is an area which potentially adds value and can reasonably be measured, and where claims are commonly made," said the paper.

The authority's analysis expands upon work by the U.K. Financial Conduct Authority, which tested whether strategies outperformed benchmarks and non-recommended funds as part of its asset management market study.

Firms included in the CMA sample were: Aon Hewitt, Capita, Hymans Robertson, Redington, Russell Investments, Willis Towers Watson, KPMG, and Lane, Clark and Peacock. Mercer does not subscribe to eVestment and could not provide ratings that could be matched with the database. The dataset related to the period of 2006-2015.

The CMA also said in its "emerging findings" that many of the outperformance figures in consultants' marketing and procurement documents are gross of fees, and that "the outperformance claimed by some parties is higher than our analysis finds. We consider that results which do not account for fee levels omit key information relevant for clients evaluating the (consultant's) performance," said the paper.

The CMA wants the industry to comment on the analysis, including on any potential remedies to its findings.