Decentralized Investment Management: Evidence from the Pension Fund Industry
David Blake,
Ian Tonks,
Allan Timmermann and
Russell Wermers ()
No 7679, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Abstract:
The past few decades have seen a major shift from centralized to decentralized investment management by pension fund sponsors, despite the increased coordination problems that this brings. Using a unique, proprietary dataset of pension sponsors and managers, we identify two secular decentralization trends: sponsors switched (i) from generalist (balanced) to specialist managers across asset classes and (ii) from single to multiple competing managers within each asset class. We study the effect of decentralization on the risk and performance of pension funds, and find evidence supporting some predictions of recent theory on this subject. Specifically, the switch from balanced to specialist managers is motivated by the superior performance of specialists, and the switch from single to multiple managers is driven by sponsors properly anticipating diseconomies-of-scale (as funds grow larger) and adding managers with different strategies before performance deteriorates. Interestingly, competition between multiple specialist managers also improves performance, after controlling for size of assets and fund management company-level skill effects. We also study changes in risk-taking when moving to decentralized management. Here, we find that sponsors appear to rationally anticipate the difficulty of coordinating multiple managers by allocating reduced risk budgets to each manager, which helps to compensate for the suboptimal diversification that results; sponsors also benefit from alpha diversification when employing multiple fund managers. Overall, our results provide support for pension fund sponsors, at least on average, rationally choosing their delegation structure.
Keywords: Asset management; Decentralized management; Pension funds; Principal agent problems (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2010-02
References: View references in EconPapers View complete reference list from CitEc
Citations:
Downloads: (external link)
https://cepr.org/publications/DP7679 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
Related works:
Journal Article: Decentralized Investment Management: Evidence from the Pension Fund Industry (2013) 
Working Paper: Decentralized investment management: evidence from the pension fund industry (2010) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:7679
Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP7679
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().