Value of consultants’ manager recommendations questioned in new report

The largest consultants' recommendations of money managers don't add a significant value, according to a new study of the U.K. money management industry.

In the research paper — Investment Consultants' Claims About Their Own Performance: What Lies Beneath? — authors Gordon Cookson, Tim Jenkinson, Howard Jones and Jose Vicente Martinez found that despite consultants' claim of higher investment performance of their recommended money managers compared to the performance of other managers in the market, "a weighted average of the claimed outperformance across three consultants over a five- to 10-year period is 1.73% per annum."

"The weighted average of 1.73% per year exceeds our estimation of their performance by 1.94% or 1.95% per year depending on calculation before or after management fees."

"For individual consultants and across asset classes, we find no evidence that the funds they recommend perform any better than other available funds," the researchers said.

But according to the paper, "We find that recommended products have similar return and risk characteristics to products that are not recommended, but deviate less from their benchmarks."

Mr. Jenkinson is professor of finance at Said Business School, University of Oxford, and director of the Oxford Private Equity Institute; Mr. Jones is an assistant professor of finance at Said; and Mr. Martinez is an assistant professor of finance, University of Connecticut School of Business. Mr. Cookson is a technical specialist at the competition and economics division of U.K. Financial Conduct Authority.

The research used a data set sourced by the U.K.'s Financial Conduct Authority from 2006 to 2015. It examined recommendations in the sample by six consultants, including three of the largest firms worldwide that have a combined market share of about 45%.

"Our results indicate that, over our 10-year sample period, the portfolio of all products recommended by investment consultants delivered average returns gross of management fees of 5.4% per year and 5.11% after management fees. These returns are on average 0.3% per annum lower than the returns obtained by other products available to plan sponsors but not recommended by consultants," the paper said.

"When comparing recommended products to a matched sample of non-recommended products classified in the same investment category, for example U.S. large-cap value equity, we find that recommended products still trail non-recommended products by 0.21% per year or by 0.23% per year after management fees."