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Pension fund switch to decentralized management right way to go

As pension funds have grown and become increasingly complex many have turned to using multiple, often pricier specialist managers to steer their investment decisions.

Has it been the right move?

A new study of the British pension fund industry, funded by the Rotman International Centre for Pension Management at the University of Toronto, shows it has, resulting in improved performance.

A team of British and American researchers looked at data from British pension funds between March 1984 and March 2004. Most funds switched from using a balanced management structure, where a manager oversaw a host of asset classes, to a decentralized, specialist management structure, with different managers for each asset class and even multiple specialists within each of those classes.

"Having this huge panel of funds and managers that they were paired with, in all kinds of situations, really allowed us to answer this question of, 'Are these guys getting their money's worth?'" said Russ Wermers, a co-researcher at the University of Maryland.

"We indeed find that specialist performance is not just cheap talk" and the higher management fees specialists charge are in line with better performance, added researcher Allan Timmermann of the University of California.

Using several different pension fund managers can lead to problems with portfolio diversification, because managers may not coordinate their investment decisions with each other. But the study found the use of multiple specialist managers more than made up for that downside through superior stock-selection skills. Pension fund sponsors dealt with coordination and diversification problems by setting lower risk levels for their portfolios. Multiple managers also added an aspect of competition that created incentives towards higher performance.

Pension funds represent a major share of the market. In 2005, pension fund assets amounted to more than $18 trillion U.S., compared to $17 trillion for worldwide mutual fund assets.

This is the first study to look at the effect of different pension management structures on performance and risk-taking.

The Rotman International Centre for Pension Management has become a global catalyst for improving pension management. The Centre sponsors research and fosters dialogue that focuses on building better pension deals, better pension fund organizations, and better pension legislation and regulation. In addition, the Centre looks for opportunities to raise pensions-related content in undergraduate, graduate, and executive programs at the Rotman School and other education-oriented forums. Further details on the Rotman International Centre for Pension Management, including access to the Rotman Journal of International Pension Management, are available at

The Rotman School of Management at the University of Toronto is redesigning business education for the 21st century with a curriculum based on Integrative Thinking. Located in the world's most diverse city, the Rotman School fosters a new way to think that enables the design of creative business solutions. The School is currently raising $200 million to ensure Canada has the world-class business school it deserves.

Ken McGuffin | EurekAlert!
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