Evidence increasingly shows that a “crime” of extensive underperformance has been committed in pension funds and endowments, according to Charles Ellis, an author and consultant to large institutional investors in the US and Asia.
(July 5, 2012) -- Underperformance among pension funds and endowments is not a mystery, but a crime among "usual suspects," according to an article by financial author and institutional investment consultant Charles Ellis.
Those guilty suspects include investment managers, fund executives, investment consultants, and investment committees, according to a newly published article by Ellis titled "Murder on the Orient Express: The Mystery of Underperformance."
Ellis explains how institutional investors' aims to "beat the market" have been consistently disappointing. While investment managers have oversimplified investment philosophies and decision-making processes, investment consultants are unable to consistently identify managers with superior future capabilities and skillfully terminate those about to disappoint, Ellis asserts. Meanwhile, investment committees "are operating in ways that do not reflect the substantial changes in investment markets."
He writes: "However unintentionally, the 'failure to perform' problem is made even worse by many funds that aim very high, set inherently unrealistic expectations, and then take on higher-volatility managers because their recent performance looks 'better.' Despite the statistical impossibility of more than one in four achieving top quartile results, a majority of funds -- more than twice the top quartile objective capacity -- solemnly declare this goal as their objective."
According to Ellis, investment committees are often presumed to be the target of causing underperformance, but they are not alone. Investment managers, fund executives, and consultants have also contributed to underperformance of some of the largest pools of capital, and until each participant recognizes its role in hindering performance, the "crime of underperformance will continue to be committed," Ellis concludes.
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