Chasing Performance is also Stupid when Pension Funds do it
Pensions & Investments' Douglas Appell reports in the July 10 issue (available online for a fee) that pension funds are screwing pensioners with a very stupid old habit that individual investors are often ridiculed for: chasing performance (a variation of recency bias):
Pension funds that set performance-based hurdles to screen manager searches - such as requiring top-quartile results over the prior three years - might be shooting themselves in the foot.
A recent study of 12,500 institutional strategies by Mercer Investment Consulting Inc., New York, concludes that excellent recent perfromance not only doesn't guarantee future results bug "generally leads to underperformance in the subsequent period."
Terry A. Dennison, a Mercer senior consultant in Los Angeles and the study's author, said in a telephone interview that the results raise the tantalizing question of whether past performance is actually a "slightly negative indicator" of future returns.
If so, the widespread use of perfromance-based screens to identify "hot" managers - understandable in organizations where decision-makers have to defend their choices - might be "just about exactly wrong," the study concluded.