Oxford Study: Why Pension Funds Still Make Poor Investment Strategies

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In a new study Dr Howard Jones at Saїd Business School, University of Oxford and Dr Jose Martinez of the University of Connecticut, explore why pension funds often follow unsuccessful investment strategies.

Our findings are sobering for the pension fund industry’

Failing conventionally? New Oxford study explores why pension funds follow investment strategies which are unlikely to work.

Pension funds allocate assets to fund managers who have done well in the past and ones that are recommended by investment consultants. But why, when past performance and consultants’ recommendations have been shown to have such little predictive power? In a new study Dr Howard Jones at Saїd Business School, University of Oxford and Dr Jose Martinez of the University of Connecticut argue that pension funds follow these measures, not because they believe in them, but to shield themselves from blame in case things go wrong.

‘The irrelevance of fund managers’ past performance in predicting future performance has long been recognised,’ according to Dr Jones, ‘but pension funds continue to allocate assets as if it matters. Likewise, there is no evidence that consultants’ recommendations have predictive power, and yet pension funds follow them closely when allocating funds. We find that this is not because pension funds naively extrapolate future performance from these indicators. The most likely explanation is that pension funds use past performance and consultants’ recommendations to duck responsibility in case they choose fund managers who perform badly.’

The study analysed thirteen years of survey data, incorporating half of the institutional holdings of U.S. equities. The team compared pension funds’ expectations of asset manager performance as well as those asset managers’ past performance and investment consultants’ recommendations, with the fund flows in and out of asset managers. They then tested whether the well documented correlation between fund flows on the one hand, and past performance and consultants recommendations on the other, results from investors extrapolating future performance from these measures, or from agency problems, or both.

‘Our findings are sobering for the pension fund industry’, adds Dr Martinez. ‘Pension fund decision makers may be sophisticated enough to see through past performance and consultants recommendations. But as long as they consider that someone in the chain of command believes in these measures, they will behave as if they do too, and their own sophistication goes to waste.’

For more information or to speak with Howard Jones please contact the press office:

Josie Powell, Press Officer, Saïd Business School
Mobile +44 (0)7711 387215; Tel: +44 (0) 1865 288403
Email: josie(dot)powell(at)sbs(dot)ox(dot)ac(dot)uk or pressoffice(at)sbs(dot)ox(dot)ac(dot)uk

Jonaid Jilani, Press Officer, Saïd Business School
Mobile: +44 (0)7860 259996; Tel: +44 (0)1865 614678,
Email: jonaid(dot)jilani(at)sbs(dot)ox(dot)ac(dot)uk

Notes to editors

About the research

The research paper can be found here:

‘Institutional investor expectations, manager performance, and fund flows’ (Feb. 2015)

About Howard Jones
http://www.sbs.ox.ac.uk/community/people/howard-jones

About Jose Vicente Martinez
http://www.business.uconn.edu/profiles/jose-martinez/

About Saïd Business School

Saïd Business School at the University of Oxford blends the best of new and old. We are a vibrant and innovative business school, but yet deeply embedded in an 800 year old world-class university. We create programmes and ideas that have global impact. We educate people for successful business careers, and as a community seek to tackle world-scale problems. We deliver cutting-edge programmes and ground-breaking research that transform individuals, organisations, business practice, and society. We seek to be a world-class business school community, embedded in a world-class University, tackling world-scale problems.

In the Financial Times European Business School ranking (Dec 2014) Saïd is ranked 10th. It is ranked 14th worldwide in the FT’s combined ranking of Executive Education programmes (May 2014) and 22nd in the world in the FT ranking of MBA programmes (Jan 2015). The MBA is ranked 7th in Businessweek’s full time MBA ranking outside the USA (Nov 2014) and is ranked 5th among the top non-US Business Schools by Forbes magazine (Sep 2013). The Executive MBA is ranked 21st worldwide in the FT’s ranking of EMBAs (Oct 2014). The Oxford MSc in Financial Economics is ranked 7th in the world in the FT ranking of Masters in Finance programmes (Jun 2014). In the UK university league tables it is ranked first of all UK universities for undergraduate business and management in The Guardian (Jun 2014) and has ranked first in ten of the last eleven years in The Times (Sept 2014). For more information, see http://www.sbs.ox.ac.uk/

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