Forbearance in Institutional Investment Management
Institutional Investor Allocator Intel has partnered with one of Europe's most sophisticated asset owner fund selector, and two leading academics, to examine the differences between institutional asset owners in how patient they are with underperforming managers. Over 200 institutional investors were surveyed from 22 countries representing over $4.1 trillion in AUM. Responses regarding their practices in delegating assets to investment managers were collected.
Ramon Tol is Senior Fund Manager Equities at Blue Sky Group (which manages the pension assets of KLM). His main responsibilities are the selection and monitoring of the external equity managers as well as implementing and evaluating transitions. He joined Blue Sky Group in February 2000 as Quantitative Analyst in the Analysis Group, were he was responsible for setting up and implementing the manager monitoring and selection process at Blue Sky Group. Ramon speaks quite frequently on international conferences regarding manager selection, monitoring and transition management. He is co-author of two articles published in the Journal of Porfolio Management (spring 2009 and 2011 edition) on the performance of 130-30 strategies. Ramon holds a Masters Degree in Economics with a specialisation in International Financial Economics and Investment Theory.
Read Ramon Tol's Interview on Allocator Intel here: Shifts & Updates to the Flight Plan
Dr. Sunil Wahal is the Jack D. Furst Professor of Finance and Director of the Center for Investment Engineering at the W.P. Carey School of Business, Arizona State University. Before joining the ASU faculty in 2005, Dr. Wahal was on the faculty at Emory University and Purdue University. Dr Wahal’s research focuses on short and long-horizon investment strategies (momentum, profitability, and others), trading issues (trading algorithm design, trading costs, and high frequency trading), and delegated portfolio management and asset allocation for large institutional investors. His work covers public equities, fixed income, and private equity. He has published extensively in the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies and numerous other journals. He is a consultant to Avantis Investors. Prior to that he was a consultant to Dimensional Fund Advisors (2005-2019), and AJO Partners. He sits on a number of investment committees for several RIAs. He is a regular speaker at academic and practitioner conferences and has given numerous presentations to sovereign wealth funds, endowments, foundations, family offices, DB plans, DC plans, and registered investment advisors.
Professor Goyal is the director of the department of Finance and Swiss Finance Institute Professor of finance at the University of Lausanne. Formerly on the faculty of the Goizueta Business School at Emory University (USA), he holds a Ph.D. in Finance from UCLA (USA). Prof. Goyal's main research interests are in empirical asset pricing, portfolio optimization, and pension funds. His current research focuses on asset allocation and international asset pricing. Prof. Goyal is a regular speaker at leading finance conferences worldwide, and his research papers have been published in the top academic journals in finance including the Journal of Finance, the Journal of Financial Economics, and the Review of Financial Studies.
The survey reveals several aspects of the institutional investment process that seem surprising. First, holding periods for the average asset manager are quite long, frequently longer than 5 years. Second, institutions are surprisingly tolerant of underperformance. This forbearance is related to sophistication and tracking error tolerance, but not to the locus of control. Finally, North American institutions are relatively more patient than their European or rest of the world counterparts and financial institutions are less tolerant of underperformance than other types of institutions.
Long Holding Periods
Holding periods for investment managers are surprisingly long: 68%, 65%, and 42% of respondents report average holding periods of longer than 5 years for public equity, fixed income and hedge funds, respectively.
Asset managers are terminated for a variety of reasons, including taking on too much or too little risk, as well as organizational changes at the investment manager or institutional investor. But poor performance is by far the dominant cause.
Tolerance for Underperformance
There is also surprising tolerance for underperformance: 66%, 56%, and 50% of respondents report a willingness to tolerate underperformance for 3 years or longer in public equity, fixed income, and hedge funds, respectively. Cross-sectional variation in forbearance is related to institution sophistication and tracking error tolerance.
Contrary to popular narratives, North American institutions are unexpectedly patient relative to their counterparts from Europe and the rest of the world.
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