Don’t feel bad, the pros can’t pick managers either

Today’s must-read article belongs to Steve Johnson at the Financial Times, who concludes that institutions have wasted billions of dollars on the advice of manager-picking consultants.

Picking investment managers is neither art nor science, it is something else entirely and, in the aggregate, it cannot really be done over long stretches of time.

At least according to those who’ve actually done the research…

On an equal-weighted basis, US equity funds recommended by consultants underperformed other funds by 1.1 per cent a year between 1999 and 2011, according to analysis of 29 consultancies accounting for more than 90 per cent of the market by a team from Oxford university’s Saïd Business School.

“In US equities, one of the largest asset classes, investment consultants as an industry appear to add no value in fund selection,” added co-author Howard Jones.

The Oxford researchers note that, with $25 trillion in institutional pools of assets under advisement by investment consults, if just one percentage point were being spent annually on manager selection, that would equate to $2.5 billion out the window.

There are many reasons for why a pension or endowment fund might want to work with counselors – covering their own asses being a perfectly valid one, or hand-holding being yet another. But attempting to discern which fund manager might beat the index this year is certainly not a valid reason, unless you don’t believe in math or history.


Billions of dollars wasted on investment advice (FT)


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