Watson Wyatt: Investment managers now dominate the “pension fund food chain”
Jul 21st, 2008 | Filed under: Investment Management FeesBack in January, consultancy Watson Wyatt released the high-level results of a study it co-authored with The Financial Times called “2020 Vision: Research on the Future Pension Landscape”. The study queried nearly 500 institutional investors from Europe and Asia on various issues.
According to the report (available here with free registration), respondents “expected the appetite for alpha to rise” and that “interest in extra-financial financial factors (such as sustainability)” were seen as increasing. We covered some of the other data in this AllAboutAlpha posting.
This month, Watson Wyatt completed the full report promised in the summary data above. It can also be downloaded here with free registration. This more lengthy narrative covers a lot of good issues, but a couple of observations really popped out at us.
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“…there can’t be enough alpha to go around to all pensions because if there was, it would be beta.
Don’t pull up just shy of the finish line!
Properly measured or attributed, the AVERAGE alpha is zero. For every investor who’s pulling down $1million of alpha, there must be investors who are CONTRIBUTING the $1MM of negative alpha.
Except, it’s a bit worse: eyeballing your chart above, there’s about 40bps of transactions costs to the average institutional investor, and if you assume that alpha is net of those costs, then the negative alpha side is 80bps shy of the $1MM.
Meaning that you need pretty damn good selection skills to find the investment management approach that will supply positive alpha.
Another observation: the predicted “shortage of talent” and “increasing use of absolute return [zero beta?] products” would seem at odds with increased transparency. An appetite for claims to deliver alpha, as opposed to proofs that a strategy will deliver alpha (which, technically speaking, is impossible), is the perfect setup for less “here’s what we’re really doing for our two-n-twenty.”
Anyone else having trouble pulling up the PDF? Only seeing the cover page when I download.
Since the link goes right to the file (through the free registration wall), try going to WW’s research page first.
(http://www.watsonwyatt.com/research/reports.asp)
Sorry for the confusion.