Pension fund decision makers continue to make investment choices on the basis of past performance so they can duck responsibility in case they choose fund managers who perform badly, according to a study.
A paper published by Saїd Business School at the University of Oxford reported that pension funds allocated assets to fund managers who had performed well in the past based on consultants' recommendations, not because decision makers believed in them, but "to shield themselves from blame in case things go wrong".
Academics and study authors Howard Jones and Jose Martinez explained there was no correlation between fund managers' past performance and predicting future performance.
Jones, senior research fellow in Finance at Saïd Business School at the University of Oxford, said: "The irrelevance of fund managers' past performance in predicting future performance has long been recognised, but pension funds continue to allocate assets as if it matters. Likewise, there is no evidence that consultants' recommendations have predictive power, and yet pension funds follow them closely when allocating funds."
In the paper Institutional Investor Expectations, Manager Performance, and Fund Flows, 13 years of survey data from institutional investors - retirement funds, foundations and universities and endowments - were analysed. The team compared institutional investors' expectations of future performance of asset managers, expectations of past performance and recommendations from investment consultants.
"Our findings are sobering for the pension fund industry", said Martinez, assistant professor at the University of Connecticut. "Pension fund decision makers may be sophisticated enough to see through past performance and consultants' recommendations. But as long as they consider that someone in the chain of command believes in these measures, they will behave as if they do too, and their own sophistication goes to waste."
