UK - Internal pension fund managers produce superior investment returns to those achieved by external firms, according to the WM Company.
The performance measurement firm claims that internal asset management teams “have a distinct advantage” over their external rivals as they can take a longer-term view of proceedings. Also, internal teams generally have an excellent working relationship with the trustees and do not have the short-term commercial pressures of externally managed funds.
Compared to externally managed funds, the advantages of having funds internally managed include “a significantly reduced level” of management fees, and a lower risk profile, which the WM Company claims translates into higher average total fund returns.
The WM Company found that internally managed UK equities funds produced both a tighter range and returns that were, on average, 0.3% better than their externally managed counterparts. Internal European equities managers also produced a tighter range and higher returns than their external counterparts, outperforming them by 0.2% over three, five-year periods from 1994 up to the present day.
North American equities produced similar results, except the average return was generally higher, with the distribution ranges of internally managed funds being slightly more compact. However, external managers did manage to outdo internal fund managers for both Japanese equities and UK bonds, despite their more diverse range of results.
The WM research also found that the median level of relative risk for internally managed funds was 1.6% pa, “significantly lower” than the external manager’s universe median of 2.2% pa. That result put internal funds into the lowest quartile of riskiness.
Despite the WM’s findings, the number of schemes possessing internal investment teams has dwindled, as a result of the constant pressure applied by external firm’s marketing teams and investment consultants, with “their vested interest in promoting external multi-manager arrangements.”
In 1985, 54 funds managed a portion of their assets internally, taking up 46% of the market. Sixteen years later, whilst the schemes now number 28, they take up 30%, leaving the WM to conclude that it was the ‘smaller’ internals that defected.
The WM research looked at the returns of 28 pension funds in the WM universe, which have a combined value of £158.1bn. The 28 funds represent 30% of the WM Universe of UK pension funds, or 25% of the total number of British schemes.
By Geoffrey Ho
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