Funds Should Be Transparent About Investments for Greater Returns

(May 25, 2010) — Preliminary studies indicate that transparency about investment beliefs often leads to greater performance.

A new study reveals the growing power of pension funds — which managed more than $23,290 billion in the 11 largest pension markets worldwide in 2009, compared to $14,236 ten years earlier, according to Towers Watson — and says that today, it is simply not enough to have a good organization, good staff and a well defined and embedded mission. The results of the study support pension funds focusing on asset allocation by pursuing the lowest cost route, taking advantage of internal resources when possible. The report also highlights the hugely detrimental investor mindset of focusing on performance over risk.

Researchers of the report for the Rotman International Centre for Pension Management in Canada show that only 40 of the world’s 500 largest pension funds publish explicit investment beliefs. A previous study — Koedijk and Slager in 2007 — suggests that pension funds who are public about their investments outperform their peers.

The new report analyzes the connection between pension fund size, investment beliefs and performance measures. It concludes that the largest funds are able to manage assets internally, benefiting from greater net returns and lower costs. Nevertheless, these large funds actively pursue the latest innovative investment strategies, which will not improve performance on a risk-adjusted basis, the report found.

Additionally, the report supports diversification, discovering that diversification is “the only free lunch in investment management.” Yet, adding more alternative strategies “apparently offsets the return-risk improvement,” the study reveals.

The research, “Investment Beliefs That Matter: New Insights Into the Value Drivers of Pension Funds,” analyzes the relationship between different ‘investment beliefs’ and performance from more than 600 pension funds, with research conducted between 1992 and 2006 on subjects such as active management, alternative asset classes and leading-edge investment strategies. The report’s authors, Slager, Kees Koedijk of Tilburg University and Centre for Economic Policy Research and Rob Bauer of Maastricht University and pensions research institute Netspar, claim that the current small proportion of pension funds publishing explicit investment beliefs has remained static in recent years despite “the growing focus on governance and investments.”