Usually when you hire an analyst to help invest your money you want to look for a sharp investor with a good record of success. Pension funds, however, don’t seem quite so discerning. A new report from NYT‘s Dealbook found that of the 94 percent of pension funds that hire outside investors to aid in making investment decisions, few look at (or even have access to) data on their consultants’ past performance. A new study from the University of Oxford suggests that they are paying a high price for their negligence:
The result of the study is nothing short of breathtaking if you’re in the investment management business: “The analysis finds no evidence that the recommendations of the investment consultant for these U.S. equity products enabled investors to outperform their benchmarks or generate alpha,” a measure of performance that adjusts for risk. The study found that, on average, the consultants’ recommendations underperformed their benchmarks by about 1 percent.
These funds spend millions for recommendations (last year Calpers alone spent $33 million in consulting fees), which is an extremely high price to pay for essentially useless advice. So why do the funds hire these firms in the first place? One of the study’s authors has an answer:
“It’s backside-covering,” Mr. Jones said. “It’s easy to say you took expert advice,” saying the rationale is similar to the adage “Nobody got fired for hiring I.B.M.”
Once again, Wall Street and pension funds have forged a tight connection to keep taxpayer money flowing to Wall Street without doing a thing for the people they are ostensibly trying to serve. We’ve seen this before, and as funds chase higher returns, we’re likely to see even more in the future.[Dollar bills image courtesy of Shutterstock]