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Alternative Market Briefing

Study: Consultants add no value to plan sponsors, but have significant effect on fund flows

Wednesday, November 20, 2013

Beverly Chandler, Opalesque London:

Oxford Said Business School academics Tim Jenkinson, Howard Jones, and Jose Vicente Martinez have published a paper entitled 'Picking winners? Investment consultants’ recommendations of fund managers’, examining what consultants bring to portfolio creation.

The authors find that U.S. plan sponsors managing over $13tln of US tax exempt institutional assets (out of $25tln worldwide) rely on investment consultants for advice about which funds to invest in. Using 13 years of survey data, they analyzed what drives consultants’ recommendations of institutional funds, what impact these recommendations have on flows, and how much value they add to plan sponsors.

The academics looked at the aggregate recommendations of consultants with a share of over 90% of the U.S. consulting market and focussed on the US active equity asset class, commenting that it is possible that this is a more efficient than other asset classes, and it is possible that elsewhere the recommendations of investment consultants are more prescient. Despite this, the study revealed that consultants’ recommendations in this asset class are highly influential.

The team writes: "This raises the question why plan sponsors engage investment consultants to help select fund managers without evidence that they add value. We identify three possible reasons. First, in keeping with the hypothe......................

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