Is Bigger Better? Size and Performance in Pension Plan Management
I. J. Alexander Dyck
University of Toronto - Rotman School of Management
AQR Capital Management, LLC
June 1, 2011
Rotman School of Management Working Paper No. 1690724
We document substantial positive scale economies in asset management using a defined benefit pension plan database. The largest plans outperform smaller ones by 43-50 basis points per year. Between a third and one half of these gains arise from cost savings related to internal management, where costs are at least three times lower than under external management. Most of the superior returns come from large plans’ increased allocation to alternative investments and realizing greater returns in this asset class. In their private equity and real estate investments large plans have both lower costs and higher gross returns, yielding up to 6% per year improvement in returns. The ability to take advantages of scale depends on plan governance with better governed plans having higher scale economies.
Number of Pages in PDF File: 59
Keywords: pension fund, investment management, economies of scale, size, alternative assets, private equity
JEL Classification: G11, G20, G23
Date posted: October 12, 2010 ; Last revised: September 29, 2011
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