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Decentralized Investment Management: Evidence from the Pension Fund Industry

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  • DAVID BLAKE
  • ALBERTO G. ROSSI
  • ALLAN TIMMERMANN
  • IAN TONKS
  • RUSS WERMERS

Abstract

The past few decades have seen a major shift from centralized to decentralized investment management by pension fund sponsors, despite the increased coordination problems that this brings. Using a unique, proprietary dataset of pension sponsors and managers, we identify two secular decentralization trends: sponsors switched (i) from generalist (balanced) to specialist managers across asset classes and (ii) from single to multiple competing managers within each asset class. We study the effect of decentralization on the risk and performance of pension funds, and find evidence supporting some predictions of recent theory on this subject. Specifically, the switch from balanced to specialist managers is motivated by the superior performance of specialists, and the switch from single to multiple managers is driven by sponsors properly anticipating diseconomies-of-scale (as funds grow larger) and adding managers with different strategies before performance deteriorates. Interestingly, competition between multiple specialist managers also improves performance, after controlling for size of assets and fund management company-level skill effects. We also study changes in risk-taking when moving to decentralized management. Here, we find that sponsors appear to rationally anticipate the difficulty of coordinating multiple managers by allocating reduced risk budgets to each manager, which helps to compensate for the suboptimal diversification that results; sponsors also benefit from alpha diversification when employing multiple fund managers. Overall, our results provide support for pension fund sponsors, at least on average, rationally choosing their delegation structure.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 68 (2013)
Issue (Month): 3 (06)
Pages: 1133-1178

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Handle: RePEc:bla:jfinan:v:68:y:2013:i:3:p:1133-1178

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References

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  1. Sharpe, W F, 1981. "Decentralized Investment Management," Journal of Finance, American Finance Association, vol. 36(2), pages 217-34, May.
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  11. Blake, David & Lehmann, Bruce N & Timmermann, Allan, 1999. "Asset Allocation Dynamics and Pension Fund Performance," The Journal of Business, University of Chicago Press, vol. 72(4), pages 429-61, October.
  12. Blake, David, 2003. "Pension Schemes and Pension Funds in the United Kingdom," OUP Catalogue, Oxford University Press, edition 2, number 9780199243532.
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Cited by:
  1. Donnelly, Catherine & Guillén, Montserrat & Nielsen, Jens Perch, 2014. "Bringing cost transparency to the life annuity market," Insurance: Mathematics and Economics, Elsevier, vol. 56(C), pages 14-27.

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