Academics slam investment consultants on performance

Investment consultants do not disclose their past manager recommendations to allow proper analysis of their own performance, and evidence from the US shows that recommendations often underperform, according to two new studies from the Said Business School.

The studies on the power and performance of investment consultants by Professor Tim Jenkinson, Dr Howard Jones and Dr Jose Martinez of Saїd Business School focus on investment consultants in the US. They argue that US equity funds recommended by consultants underperform others by 1.1 per cent a year, on an equal weighted basis.

The study How Institutional Investors Form And Ignore Their Own Recommendations argues it is consultants’ recommendations and asset managers’ past performance that drives flows into asset managers rather than institutions’ expectations of performance.

A second study Picking Winners? Investment Consultants’ Recommendations of Fund Managers argues consultants’ recommendations of funds are driven largely by soft factors, rather than the funds’ past performance, and that their recommendations have a very significant effect on fund flows, yet there was no evidence that these recommendations add value to plan sponsors. The report classified soft factors as ‘Clear Decision Making, Capable Portfolio Manager, and Consistent Investment Philosophy’, all of which investment consultants took into account when making recommendations, but a fourth and arguably most important factor, ‘the Future Performance the Respondent Expects from the Asset Manager’, was widely ignored.

Jones says: “In U.S. Equities, one of the largest asset classes, investment consultants as an industry appear to add no value in fund selection.

Plan sponsors need to be able to assess the track record of investment consultants but since consultants do not disclose their individual recommendations, pension funds are allocating assets on advice the quality of which it is impossible to judge. It is high time that the pension funds or regulators required consultants to disclose their past recommendations. Unless investment consultants are ashamed of their performance, they should come out of the shadows.

Jenkinson says: “Our research has clear implications for policy. A disclosure regime is needed like that followed by research analysts who disclose the past recommendations for all the stocks they cover. This gives investors an idea of the value of the analysts’ input. Disclosure along these lines would make the consultant industry more competitive, and the allocation of institutional assets would be more efficient.”