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Decentralized Investment Management: Evidence from the Pension Fund Industry

  • Blake, David
  • Timmermann, Allan G
  • Tonks, Ian
  • Wermers, Russ

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7679.

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Date of creation: Feb 2010
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Handle: RePEc:cpr:ceprdp:7679
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  1. Sandeep Kapur & Allan Timmermann, 2004. "Relative Performance Evaluation Contracts and Asset Market Equilibrium," Finance 0408005, EconWPA.
  2. Jeffrey A. Busse & Amit Goyal & Sunil Wahal, 2010. "Performance and Persistence in Institutional Investment Management," Journal of Finance, American Finance Association, vol. 65(2), pages 765-790, 04.
  3. Jonathan B. Berk & Richard C. Green, 2002. "Mutual Fund Flows and Performance in Rational Markets," FAME Research Paper Series rp100, International Center for Financial Asset Management and Engineering.
  4. Grinblatt, Mark & Titman, Sheridan, 1993. "Performance Measurement without Benchmarks: An Examination of Mutual Fund Returns," The Journal of Business, University of Chicago Press, vol. 66(1), pages 47-68, January.
  5. David Blake & Allan Timmermann, 2002. "International asset allocation with time-varying investment opportunities," LSE Research Online Documents on Economics 24944, London School of Economics and Political Science, LSE Library.
  6. Kosowski, Robert & Timmermann, Allan & Wermers, Russ & White, Hal, 2005. "Can mutual fund stars really pick stocks? New evidence from a bootstrap analysis," CFR Working Papers 05-14, University of Cologne, Centre for Financial Research (CFR).
  7. Christopherson, Jon A & Ferson, Wayne E & Glassman, Debra A, 1998. "Conditioning Manager Alphas on Economic Information: Another Look at the Persistence of Performance," Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 111-42.
  8. Sharpe, W F, 1981. "Decentralized Investment Management," Journal of Finance, American Finance Association, vol. 36(2), pages 217-34, May.
  9. Coggin, T Daniel & Fabozzi, Frank J & Rahman, Shafiqur, 1993. " The Investment Performance of U.S. Equity Pension Fund Managers: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 48(3), pages 1039-55, July.
  10. Blake, David, 2003. "Pension Schemes and Pension Funds in the United Kingdom," OUP Catalogue, Oxford University Press, edition 2, number 9780199243532.
  11. Grinblatt, Mark & Titman, Sheridan, 1994. "A Study of Monthly Mutual Fund Returns and Performance Evaluation Techniques," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(03), pages 419-444, September.
  12. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  13. Ian Tonks, 2002. "Performance persistence of pension fund managers," LSE Research Online Documents on Economics 24942, London School of Economics and Political Science, LSE Library.
  14. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 433-46, July.
  15. Joseph Chen & Harrison Hong & Ming Huang & Jeffrey D. Kubik, 2004. "Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization," American Economic Review, American Economic Association, vol. 94(5), pages 1276-1302, December.
  16. 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.
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