Who Should Choose the Money Managers? Institutional Sponsors’ Equity Manager Performance

Abstract

Institutional sponsors increasingly seek outside help in investment management by delegating manager selection and capital allocation decisions to external lead managers. Whether this enhances performance, however, is yet to be examined. We fill the gap using a unique dataset of Korean institutional sponsors that enables a detailed comparison of domestic equity funds selected by the sponsors against those by lead managers. We find that lead managers allocate their capital more efficiently and are able to identify managers with greater skill. Their positive implications on performance appears to emanate from the lead managers’ ability to detach themselves from the sponsors’ internal organizational issues.

Keywords: Delegated portfolio management, institutional investors, intermediated investment management, outsourced CIO, investment pool

JEL Classification: G11, G20, G23