An academic paper published last month by Tim Jenkinson, Howard Jones and Jose Vicente Martinez, entitled “Picking winners? Investment consultants’ recommendations of fund managers” has received much attention in the pension industry – and rightfully so. (FT: “Billions of dollars wasted on investment advice”).
The authors study the aggregate recommendations for US active long-only fund managers made by the largest investment consultancies and “find no evidence that these [fund recommendations] add value to plan sponsors” despite the immense amount of fees being charged for such recommendations.
We are delighted to see yet another study which proves what we have been saying for many years now – that in the most efficient asset classes, such as US long-only equities, passive investing is the way to go. Of course the large consultancies know this, but the fees associated with making active manager recommendations are just too much to resist.
In the case of less efficient asset classes, such as absolute return – where the dispersion of returns across managers tends to be higher – there is much more room to add value through fund selection. The authors leave room for this, stating: “Our analysis focuses on one asset class, U.S. active equity, which may be more efficient than other asset classes, and it is possible that elsewhere the recommendations of investment consultants are more prescient.” Indeed our experience has been that careful fund selection in less efficient asset classes can lead to investments that not only outperform on an absolute basis, but also on a risk-adjusted basis.
The other interesting point made in the paper is that the investment consulting industry is highly concentrated, such that “the top ten [consultancies] worldwide have a market share of 82%.” It continues to fascinate us how pension funds find comfort working with the largest consultancies, knowing full well that it is simply impossible to beat the market when you are taking advice from the market.