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Decentralized investment management: an analysis of non-profit pension funds

Published online by Cambridge University Press:  14 February 2007

HAZEL BATEMAN  and
SUSAN THORP
HAZEL BATEMAN
Affiliation:
University of New South Wales, Sydney
SUSAN THORP
Affiliation:
University of Technology, Sydney
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Abstract

We investigate delegated investment management in private pension accounts using data from Australian accumulation (superannuation) funds. In Australian non-profit pension funds, trustees choose investment managers on behalf of members. We find that funds with many delegated managers have higher risk-adjusted returns than those with few. However funds with 13 or less specialized managers show no improvement over funds with a single diversified manager. All do worse than a benchmark portfolio of asset-class indices. Further, by using random selection to mimic the choices of an uninformed individual choosing from the same menu of delegate managers as used by trustees, we show that returns from pension funds with large numbers of trustee-selected managers compare favorably with returns from randomly selected, equally weighted portfolios. However this improvement falls off quickly for funds with fewer trustee-selected managers, or when randomly selected portfolios are also diversified across asset classes. Results indicate that an uninformed individual following a naive diversification strategy would have done as well as most trustee boards in this sample.

Type
Research Article
Information
Journal of Pension Economics & Finance , Volume 6 , Issue 1 , March 2007 , pp. 21 - 44
Copyright
© 2007 Cambridge University Press

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Footnotes

We thank Tony Hall, Geoff Kingston, Robert Kohn, Olivia Mitchell, participants at the 13th Australian Colloquium of Superannuation Researchers, seminars participants at Queensland University of Technology and University of Technology Sydney, and anonymous referees for helpful comments. Alex Dunnin and colleagues at Rainmaker Information gave expert help with data and advice. The support of the Australian Research Council is gratefully acknowledged.