Results were noisy, but a new paper shows consultants overall struggle to add value through fund selection, writes Morningstar's John Rekenthaler.
Last week, The Economist profiled a forthcoming Journal of Finance paper--Picking Winners? Investment Consultants’ Recommendations of Fund Managers--about the performance of institutional investment consultants. The headline: "Nobody knows anything."
Dramatically put, and a clever echo of William Goldman’s line about Hollywood. I’d be delighted to pen that headline. However, it is more than a slight exaggeration.
The authors--Tim Jenkinson and Howard Jones at Oxford and Jose Vicente Martinez at the University of Connecticut--obtained a database of recommendations for U.S. equity funds made by investment consultants who serve large institutional plans.
(The funds were large separate accounts, rather than registered mutual funds, which presented the authors with some difficulties, as separate account databases are not as clean as mutual fund databases. The authors did what they could--enough, I think, so that their general findings stand.)
Because the database pooled all recommendations without distinguishing either by individual or company, the professors could only compare the aggregate performance of recommended funds to the aggregate performance of all other funds. The study cannot measure the results of individual analysts or companies.
This is how I would summarize the paper--
Over a 12-year period, when selecting among a certain type of fund, the overall results of the funds recommended by a group of U.S. institutional investment consultants cannot be demonstrated to be superior to the overall results of funds that they did not recommend. It is possible that some of these analysts excelled at selecting that type of fund; it is possible that some or most or even all of these analysts excelled at selecting other types of funds; and it is possible that some or most or even all of these analysts excelled at tasks besides fund selection, such as asset allocation or liability matching.