Mutual Funds vs. Pension Funds. Can you spot the difference?
Mar 28th, 2007 | Filed under: Hedge Fund RegulationThe Performance of U.S. Pension Funds: New Insights into the Agency Cost Debate
By: Rob Bauer, Rik Frehen, Hubert Lum and Roger Otten
Published: February 22, 2007
Think back to before the Wii, before X-Box, and even before “Grand Theft Auto” - when kids did puzzles like connect-the-dots or spot-the-difference. Well, a study released last month tries to “spot the difference” between mutual funds and comparable pension funds with the same mandates. All in all, researchers were successful - spotting several differences that set mutual funds apart from very similar pension funds, including one big one that starts with “under-” and ends with “-performance“.
Alphaphiles will note that performance differences between two funds with the same (beta) benchmark must be chalked up to differences in alpha. And with alpha a scarce commodity in long-only funds of all stripes, it doesn’t take much to jeopardize the whole enterprise of active investing.
While $6 trillion is invested in U.S. pension funds, very little is known about their performance. Research on pension fund performance over the past 30 years has been a real dog’s breakfast with some studies showing pensions beat the market and some showing they lagged it. The problem is that these studies have been conducted over various time frames, using various definitions of “pension fund” and using various benchmarks to measure success.
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[…] Just in case anyone was left with the impression that pension funds are immune from agency costs after reading last Thursday’s post, check out what the pension plan for Canada’s famous “Mounties” is accused of. According to reports by national TV network CTV on Friday, allegations against the multi-billion plan include: “Of the 65 people who worked at the pension division, 49 were related to senior RCMP members. In some cases, the nepotism involved entire families. Senior RCMP members used pension funds for golfing trips to destinations like St. Andrew’s-by-the-Sea, N.B. In one email exchange, resort employees at St. Andrew’s-by-the-Sea explained an unusual billing structure: ‘The purpose of this is to hide the golf rates in the room rates and to expense the golf,’ the email reads.” […]