Internal Managers Trump outside Pension Advisors

March 6, 2002 (PLANSPONSOR.com) - Pension funds with on-staff advisors end up with better investment results than those who outsource their asset management tasks, a UK study found.

The study of 28 internally managed funds managing £158 billion pounds showed that the funds enjoyed lower risks, which resulted in higher average total returns. The study was undertaken by WM Company, a research firm.

According to WM, the majority of the internal funds actively manage their UK equities. The funds produced a 0.3% average annual return over rolling three and five-year periods.
 
Similar results apply for North American stocks, while European equities turned in a 0.2% average annual gain, again showing a “significantly lower dispersion of returns”, according to WM. The only area where outside managers triumphed was with Japan equities and UK bonds.

The funds held an average 212 UK stocks – much more than the average portfolio managed outside, WM said.

Lower Turnover Means Lower Cost

But the internal funds’ activity was much lower. Average portfolio turnover was 31% for internal UK equities, compared with 53% externally. For European equities the ratios were 74% versus 85%. For UK bonds the internal rate of change was at 82% compared with 141% for external.

WM said the lower portfolio turnover gives internally managed funds a strong advantage due to their lower cost base, it notes.

WM also point out that internal funds have a lower risk profile with an average tracking annual error of 1.6%, which is equivalent to the 75th percentile for external funds. This puts internal funds in the lowest quartile of riskiness.

Funds involved in the study represent a quarter of the UK pension market, compared with 46% 15 years ago. In 80% of these funds, six out of 10 members are either inactive workers or pensioners.

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