Research Insights

Original Research

Value Added by Large Institutional Investors between 1992 - 2013

Alex Beath

January 2015

Can large institutional investors beat the market and deliver added value above and beyond their benchmarks? We answer this question using a massive data set comprised of 6,666 samples drawn from a global set of defined benefit pension plans along with a handful of sovereign wealth funds and buffer funds spanning 1992‐2013. Gross of investment management expenses, funds deliver 58 basis points of value added. Net of investment management expenses, funds deliver 16 basis points of value added. A deep regression analysis indicates that beating the market is rooted in active asset management paired with cost savings gained through scale and managing assets in‐house.

The primary way pension funds quantify their performance remains the tried and true method of constructing a total fund policy benchmark based on asset class policy weights and comparing their performance to it. While some in the industry see the method as being outdated, the benefits remain clear; fund performance is easily separated into two parts, a return that can be attributed to active management (i.e., alpha) and a return attributed to the market (i.e., beta). As the method is available to all, even those who feel it imperfect should perform the exercise to answer the simple question; did you get what you paid for?

A widely held academic belief is that the result of the exercise should show that active investors have, on average, no advantage over passive investors (i.e., alpha is zero). This view of markets is rooted in the efficient market hypothesis [1,2]. A problem with testing the hypothesis is that the separation between alpha and beta is not always clear; where one set of benchmarks demonstrates a non‐zero alpha, another set can almost always be found that shows that the alpha is zero.

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