Managing career risk and defending loss-making decisions are more pressing concerns for CIOs choosing an asset manager than the expectation the investment might do well, according to claims from an academic paper.
Past performance, consultant recommendations, and “soft factors” such as clear investment processes and meeting follow-ups, are more influential to an investor’s decision than whether they expect a manager will actually perform, the paper claimed.
“Plan sponsors chase past performance and consultants’ recommendations because they feel that… these indicators are more defensible to their superiors, stakeholders and, possibly, the courts than their own expectations are.” —Jones & Martinez“The partial dependency of expected performance on past performance and soft factors is not, in itself, irrational: investors could use such variables as signals of future performance,” said Howard Jones at the University of Oxford’s Saïd Business School, and Jose Vicente Martinez at the University of Connecticut.
“What does seem irrational is that past performance is relied upon when it is uninformative about future performance (except over periods too short for the plan sponsor to exploit); the same goes for soft factors, which are also poor predictors of future performance.”
The pair used data collected between 1999 and 2011 by Greenwich Associates, which asked 781 investors about performance and service from their asset managers; it also asked for the names of their managers and recommendations. Jones and Martinez put these responses next to data collated by eVestment, which looked purely at performance. Only data regarding long-only equities was considered and all information was collected anonymously from investors.
After examining the data, the pair found that rather than putting the potential returns to funds of which they were fiduciaries front and centre, CIOs and other investment chiefs placed their own self-interest first.
“Plan sponsors chase past performance and consultants’ recommendations because they feel that, as a rationale for selecting asset managers, these indicators are more defensible to their superiors, stakeholders and, possibly, the courts than their own expectations are,” the paper said.
Investors implemented “scapegoat strategies”, according to the authors, with many preferring to “fail conventionally”, as Keynes put it, rather than act on their own instinct, which could prove wrong.
The authors concluded that instead of taking their own investment advice, CIOs generally took the decision that would be easy to defend in the event of a loss or problem.
Even service factors, such as meeting preparation/follow-up and a capable relationship manager, which appear in principle unrelated to investment results, also seem to have a significant impact on expectations, the pair said.
“This is perhaps because service factors are read by institutional investors as being informative about the general business practices of the asset manager, which might also be reflected in expected future performance,” the paper claimed.
While much of what the pair found was understandable, the paper said, CIOs continued to go against their own judgement for the sake of their own career.
“The policy implications of this are sobering,” Jones and Martinez concluded. “For, as long as sponsors consider that they will be judged by others who do believe that past performance and consultants’ recommendations are informative about future performance, sponsors will behave as if they do so themselves, even if this is not the case.”
The full paper is available for download.
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