Here's a brainteaser: Would you invest $10,000 in a mutual fund without knowing its past performance? Probably not. Yet, if you were in charge of $13 trillion of pension money, would you accept the recommendation of an investment consultant without knowing its performance record? The answer is yes. It happens every day.
Welcome to the bizarre world of pension funds and investment consultants. At a time when individual investors are increasingly demanding transparency in performance track records, the biggest slice of the investment world — pension funds — has conspicuously turned a blind eye to demanding track records from their most influential advisers, investment consultants.
A new study by professors at the University of Oxford is causing a stir in the staid pension investment industry, highlighting the subpar performance of most consultants and, more important, the lack of disclosure that would allow the public to even know about it.
The study demonstrates, perhaps for the first time, that the investment consultants that pension funds rely on to advise them about what funds and investments they should make — resulting in tens of millions of dollars in fees each year — are, as one of the authors of the survey says, "worthless."
"It's a waste of money listening to consultants," Howard Jones, one of the authors of the study, told me he concluded. "It's a service that is useless."
Mr. Jones and his colleagues, Tim Jenkinson and Jose Vicente Martinez, examined the recommendations of investment consultants from 1999 to 2011 related to United States equities. It culled the data from Greenwich Associates, which had collected it anonymously from 29 firms, representing 91 percent of the entire investment consulting industry's market share in the United States.
The result of the study is nothing short of breathtaking if you're in the investment management business: "The analysis finds no evidence that the recommendations of the investment consultant for these U.S. equity products enabled investors to outperform their benchmarks or generate alpha," a measure of performance that adjusts for risk. The study found that, on average, the consultants' recommendations underperformed their benchmarks by about 1 percent.
Those recommendations are worth big fees to the consulting firms. In 2012, Calpers, the big California pension fund, paid $33 million in fees to outside investment consultants. CalSTRS, the California teachers' fund, spent nearly $9 million. New York State and Local Retirement System spent nearly $7 million. Pennsylvania State Employees' Retirement System spent about $4 million. The list goes on.