Decentralized Investment Management: Evidence from the Pension Fund Industry

57 Pages Posted: 10 Feb 2010

See all articles by David P. Blake

David P. Blake

City University London - Cass Business School

Allan Timmermann

UCSD ; Centre for Economic Policy Research (CEPR)

Ian Tonks

University of Bristol

Russ Wermers

University of Maryland - Robert H. Smith School of Business

Date Written: February 2010

Abstract

The past few decades have seen a major shift from centralized to decentralized investment management by pension fund sponsors, despite the increased coordination problems that this brings. Using a unique, proprietary dataset of pension sponsors and managers, we identify two secular decentralization trends: sponsors switched (i) from generalist (balanced) to specialist managers across asset classes and (ii) from single to multiple competing managers within each asset class. We study the effect of decentralization on the risk and performance of pension funds, and find evidence supporting some predictions of recent theory on this subject. Specifically, the switch from balanced to specialist managers is motivated by the superior performance of specialists, and the switch from single to multiple managers is driven by sponsors properly anticipating diseconomies-of-scale (as funds grow larger) and adding managers with different strategies before performance deteriorates. Interestingly, competition between multiple specialist managers also improves performance, after controlling for size of assets and fund management company-level skill effects. We also study changes in risk-taking when moving to decentralized management. Here, we find that sponsors appear to rationally anticipate the difficulty of coordinating multiple managers by allocating reduced risk budgets to each manager, which helps to compensate for the suboptimal diversification that results; sponsors also benefit from alpha diversification when employing multiple fund managers. Overall, our results provide support for pension fund sponsors, at least on average, rationally choosing their delegation structure.

Keywords: asset management, decentralized management, pension funds, principal agent problems

JEL Classification: G11, G23

Suggested Citation

Blake, David P. and Timmermann, Allan and Tonks, Ian and Wermers, Russell R., Decentralized Investment Management: Evidence from the Pension Fund Industry (February 2010). CEPR Discussion Paper No. DP7679. Available at SSRN: https://ssrn.com/abstract=1550591

David P. Blake (Contact Author)

City University London - Cass Business School ( email )

London, EC2Y 8HB
Great Britain
+44 (0) 20-7040-5143 (Phone)
+44 (0) 20-7040-8881 (Fax)

Allan Timmermann

UCSD ( email )

9500 Gilman Drive
La Jolla, CA 92093-0553
United States
858-534-0894 (Phone)

HOME PAGE: http://rady.ucsd.edu/people/faculty/timmermann/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ian Tonks

University of Bristol ( email )

Department of Finance and Accounting
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

Russell R. Wermers

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

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