'Pension funds allocate assets to fund managers who have done well in the past and ones that are recommended by investment consultants. But why, when past performance and consultants’ recommendations have been shown to have such little predictive power? In a new study Dr Howard Jones at Saїd Business School, University of Oxford and Dr Jose Martinez of the University of Connecticut argue that pension funds follow these measures, not because they believe in them, but to shield themselves from blame in case things go wrong.
‘The irrelevance of fund managers’ past performance in predicting future performance has long been recognised,’ according to Dr Jones, ‘but pension funds continue to allocate assets as if it matters. Likewise, there is no evidence that consultants’ recommendations have predictive power, and yet pension funds follow them closely when allocating funds. We find that this is not because pension funds naively extrapolate future performance from these indicators. The most likely explanation is that pension funds use past performance and consultants’ recommendations to duck responsibility in case they choose fund managers who perform badly.’