markets

Money Managers Go With Their Comfort Zones Over Returns, Survey Shows

  • Portfolio heads tend to stick with most familiar instruments
  • Asset managers need to focus on ‘explicit and implicit costs’

Your money manager could be doing a better job maximizing performance.

A new survey from Greenwich Associates found that many institutional investors do not consider how to get the most efficient exposure to an asset or industry when allocating capital. That’s leading them to trade the same types of securities time after time, rather than branching out from, say, bonds into exchange-traded funds or swaps.

“The comfort zone isn’t always the right place to be,” wrote Kevin McPartland, head of research for market structure and technology at the financial-services consulting firm. “Ultimately, making a suboptimal choice that did not take into account both explicit and implicit costs could, over time, have a major impact on fund performance.”

Greenwich interviewed more than 40 institutional investors in the U.S. and Europe, of which 63 percent managed $5 billion or more. Less than a third of those polled analyze the transaction costs before a trade and almost 40 percent fail to consider which particular instruments they chose when reviewing execution, the survey found.

Buy-Side Bias

Most investors don't use transaction cost analysis before trading

Source: Greenwich Associates

The company’s findings come at a time when every basis point matters for money managers trying to fight the shift by investors toward cheaper, passive strategies. More than $118 billion flowed into passive index trackers such as exchange-traded funds in the first quarter, as active mutual funds idled, data from Bloomberg Intelligence show. Most of the passive haul went into ultra low-cost funds.

Investor ignorance could present an opportunity for the sell-side -- if those traders can overcome their own biases and silos. More than two-thirds of money managers lacked the ability to systematically compare alternatives throughout the day, despite investing $7 billion in technology over the past 12 months. So dealers could assist their clients by referring them to other desks in some instances, said Greenwich. However, compensation policies work against that, Greenwich reported.

But something has to give if active portfolio managers want to keep their jobs in this new low-cost paradigm.

“While we by no means want to minimize the value of a top-tier portfolio manager, they are human and will tend to utilize the instruments with which they have the most experience,” McPartland wrote. “A move toward more systematic instrument selection would ultimately enhance fund returns by capturing alpha invisible to the naked eye.”

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