Fee structures for active fund managers provide "a strong disincentive" to outperform, according to a report headed by David Blake at the University of London Pensions Institute.
The report – Performance Clustering and Incentives in the UK Pension Fund Industry – said active management was “a negative value-added industry” and that fees were generally related to year-end asset values and not directly to performance of active managers.
The report said fee structures which focused on relative rather than absolute performance was driving the tendency of managers to “herd” around the benchmark – a criticism made by Myners in his institutional investment review.
The report said: “We find evidence of clustering in the performance of a large cross-section of UK pension fund managers around the median fund manager. We explain this finding in terms of: the predominance of a single investment style (balanced management) the fee structures and incentives operating in the UK pension fund industry to maximise relative rather than absolute performance, the high concentration in the UK pension fund industry and the low turnover of fund managers.”
Pensions Institute director Professor David Blake said: “A narrow dispersion of returns around the median fund manager and the slight underperformance of the median fund manager compared with the market average appear to be the result of the incentive effects of the fee structures, the performance evaluation environment and the degree of concentration in the UK pension fund industry.”
Blake said: “Fund managers are being paid active fund management fees but doing little more than matching the index because they do not want to be too much out of line with each other. Large fund management houses are like a convoy of ships, all sailing together to protect themselves against harsh weather conditions.”
He added that the heavy concentration of UK pension funds – 80pc of funds are managed by just five fund management houses – compounded the problem of clustering.
The report said: “This [heavy concentration] results in the asset allocations of a large number of pension funds being influenced by a small number of ‘house views’ on key economic and market conditions.”By comparison, in the US the top five houses accounts for only 14pc of the market, according to the report.
Blake said: “The findings raise two questions, firstly why pension fund trustees are willing to pay for active fund management when there fund manager is a closet index matcher. Secondly, if fund managers think they are smarter than the average why aren’t they willing to accept performance related fees?”
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