The Challenge in Finding the Best Fund Managers for Endowments

In the tough and unpredictable industry of investment and finance, many pension funds and endowments hope to secure their stability by selecting the right fund managers. This task, however, is the most critical and challenging part.

While some might consider reviewing the previous records of fund managers as the best approach, an article recently published in The Economist site by Buttonwood’s Notebook emphasized that this strategy does not really seem to work.

"Many pension funds and endowments hire investment consultants to help them choose fund managers (one estimate is that 82% of US pension plans use such services, and consultants advise on $25 trillion of assets)," said the report.

These high figures demonstrate the popularity of the "hand-holding principle," where clients entrust the decision-making process to a third-party. This allows them to get a sense of security by 1.) giving the administrative burden to others, and 2.) having someone to blame in case things go wrong.

Despite these statistics, an award-winning academic paper by Tim Jenkinson, Howard Jones and Jose Vicente Martinez titled "Picking Winners? Investment Consultants' Recommendations of Fund Managers" concluded that suggestions from consultants don’t add significant value.

"…The portfolio of all products recommended by investment consultants delivered average returns net of management fees of 6.31% per year (7.13% before fees)," the study explained. "These returns are, on average 1.12% lower than the returns obtained by other products available to plan sponsors, which are not recommended by consultants," it added.

One possible reason behind this scenario is that consultants tend to endorse big funds and as to how Buttonwood puts it "big funds tend to underperform." Another factor that causes this is when consultants choose to play safe.

Because of this, clients are advised to scrutinize the strategies of asset management firms themselves. "In short, while one can be willing to accept that there are smart fund managers who can outperform the market, the trick is identifying such managers in advance," Buttonwood explained.

This process really takes time. Since relying on the past performances of the firm is no longer a smart move, investors should focus on the present and the future. Outlining the objectives and evaluating how fund managers could help them meet those goals can be an old but gold trick. Evaluation involves a deep understanding of many facets of asset management including but not limited to the fund administration platform, practices and ways on how to mitigate risks and disaster and recovery tools.

Get in touch with a firm that specializes in fund administration to know more about dealing with pensions and endowments.

Leo Aranas is an online writer and blogger.