Decentralized Investment Management: Evidence from the Pension Fund Industry







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    • Blake is from the Pensions Institute, Cass Business School, City University London; Rossi is from the Smith School of Business, University of Maryland at College Park; Timmermann is from the Rady School, University of California at San Diego; Tonks is from the University of Bath School of Management; and Wermers is from the Smith School of Business, University of Maryland at College Park. We are especially grateful to the Rotman International Centre for Pension Management (ICPM) at the University of Toronto as well as Inquire-U.K. for financial support. Members of the board of the ICPM research committee also provided insightful suggestions for improving our paper. We are also grateful to Alan Wilcock and Daniel Hall of BNY Mellon Asset Servicing for providing us with the CAPS pension fund performance data and for patiently answering an endless list of questions concerning the data. Rosalin Wu provided excellent research assistance on this project. The paper has benefited from comments made at presentations at the 2011 Netspar International Pension Workshop (Turin), 2009 Inquire-U.K. and Europe Joint Seminar (Edinburgh), 2009 Paul Woolley Centre Annual Conference (London School of Economics), 2009 European Finance Association (EFA) Annual Meetings (Bergen), and in particular from the comments of our discussants at the Netspar, Woolley, and EFA conferences: Marno Verbeek, Clemens Sialm, and Erik Kole, respectively. We also sincerely thank those members of the pension fund community who responded to our survey questions about trends in the industry. We thank Ralph Koijen, Campbell Harvey (the Editor), and an anonymous referee for numerous valuable comments. This work represents the views of the authors and not those of Inquire-U.K. or ICPM.


Using a unique data set, we document two secular trends in the shift from centralized to decentralized pension fund management over the past few decades. First, across asset classes, sponsors replace generalist balanced managers with better-performing specialists. Second, within asset classes, funds replace single managers with multiple competing managers following diverse strategies to reduce scale diseconomies as funds grow larger relative to capital markets. Consistent with a model of decentralized management, sponsors implement risk controls that trade off higher anticipated alphas of multiple specialists against the increased difficulty in coordinating their risk-taking and the greater uncertainty concerning their true skills.