Swedroe: Institutional's Tiny Edge

July 03, 2017

With tens of trillions of dollars under management, the performance of institutional asset managers is of great interest. One reason is that institutional managers have at least some theoretical advantages over retail investors.

For example, they often hire professional consultants to help them perform due diligence in interviewing, screening and ultimately selecting the very best of the best. And you can be sure these consultants have thought of every conceivable screen to identify superior fund managers.

Surely they have considered not only managers’ performance records, but also factors such as their management tenure, depth of staff, performance consistency (to ensure a long-term record isn’t the result of one or two lucky years), performance in bear markets, consistency of strategy implementation, costs, turnover and so on. It’s unlikely that, when evaluating a fund, you or your financial advisor would think of something they hadn’t already considered.

An Asset Manager Study
Joseph Gerakos, Juhani Linnainmaa and Adair Morse contribute to the literature on the performance of institutional asset managers with their November 2016 paper, “Asset Managers: Institutional Performance and Smart Betas.” Their study covered the period 2000 through 2012, on average $18 trillion in annual assets, and 22,289 asset manager funds marketed by 3,272 asset manager firms.

The authors’ analysis focused on four asset classes that represent the lion’s share of global invested capital: U.S. fixed income (21% of delegated institutional assets); global fixed income (27%); U.S. public equity (21%); and global public equities (31%).

Their study is free of survivorship bias. In measuring performance, they used 170 different strategy benchmarks. For example, Australian equities were represented by a benchmark.

Following is a summary of their findings:

 

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