Decentralized Investment Management: Evidence from the Pension Fund Industry

56 Pages Posted: 22 Jun 2020

See all articles by David P. Blake

David P. Blake

City, University of London

Alberto G. Rossi

Georgetown University

Allan Timmermann

UCSD ; Centre for Economic Policy Research (CEPR)

Ian Tonks

University of Bristol - Department of Finance and Accounting

Russ Wermers

University of Maryland - Robert H. Smith School of Business; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2012

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 within an asset class (as funds grow larger) and adding managers with different strategies before performance deteriorates. Indeed, we find that sponsors benefit from alpha diversification when employing multiple fund managers. 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 anticipate the difficulty of coordinating multiple managers by allocating reduced risk budgets to each manager, as predicted by recent theory, which helps to compensate for the suboptimal diversification that results through an improved Sharpe ratio. Overall, our results indicate that pension fund sponsors, at least on average, rationally choose their delegation structures.

JEL Classification: G11

Suggested Citation

Blake, David P. and Rossi, Alberto G. and Timmermann, Allan and Tonks, Ian and Wermers, Russell R., Decentralized Investment Management: Evidence from the Pension Fund Industry (July 2012). Available at SSRN: https://ssrn.com/abstract=3612342 or http://dx.doi.org/10.2139/ssrn.3612342

David P. Blake (Contact Author)

City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZX
Great Britain
+44 (0) 20-7040-8600 (Phone)
+44 (0) 20-7040-8881 (Fax)

HOME PAGE: http://www.pensions-institute.org/

Alberto G. Rossi

Georgetown University ( email )

McDonough School of Business
Georgetown University
Washington, DC 20057
United States

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 - Department of Finance and Accounting ( 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://terpconnect.umd.edu/~wermers/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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