Abstract:
We investigate delegated investment management in private pension accounts using data
from Australian accumulation (superannuation) funds. In Australian non-profit pension
funds, trustees choose investment managers on behalf of members. We find that funds with
many delegated managers have higher risk-adjusted returns than those with few. However
funds with 13 or less specialized managers show no improvement over funds with a single
diversified manager. All do worse than a benchmark portfolio of asset-class indices. Further,
by using random selection to mimic the choices of an uninformed individual choosing from
the same menu of delegate managers as used by trustees, we show that returns from pension
funds with large numbers of trustee-selected managers compare favorably with returns
from randomly selected, equally weighted portfolios. However this improvement falls off
quickly for funds with fewer trustee-selected managers, or when randomly selected portfolios
are also diversified across asset classes. Results indicate that an uninformed individual
following a naive diversification strategy would have done as well as most trustee boards in this
sample.
