Network Centrality and Delegated Investment Performance
Research Retrieved: September 2018
Retrieve the paper from the SSRN.
Pension funds employ multiple fund managers who each oversee a portion of the total portfolio of the sponsor. These fund management firms also manage the assets of many other pension funds. Investment consultants are also hired by multiple pension funds. These contracts create network links between fund managers and the investment consultants advising the pension funds as well as fund managers. The paper studies the relation between the network centrality of asset managers and fund manager performance, risk taking, fund flows and fund manager tenure. Where network centrality is a measure of the number of pension funds for which a fund manager oversees the management of the portfolio.
- Managers who are more central in a network, tend to have higher risk adjusted return. This effect is not driven by the ability of consultants to select better skilled managers.
- Network connections positively affect the flow of funds. Managers who are more integrated in the network attract more new pension funds’ assets than more assets from existing clients. This effect, as well as the network effect on risk adjusted returns, holds after controlling for the size of the asset manager.
- More networked managers take more risk. This is consistent with more central managers having a higher level of private information coming from their network position. Pension funds tolerate such higher risk taking because of superior higher performance of more central managers.
- More networked managers face significantly reduced probability of having their employment terminated, after controlling for size and past performance.
This research highlights the importance of asset managers in the investment process of pension funds. It shows that the performance of asset managers is not purely driven by firm characteristics such as size or by the ability of the investment consultants in selecting skilled managers. Being centrally located in a manager network fosters better risk-adjusted performance. This positive relationship is most likely explained by two information transmission mechanisms that propagates throughout the networks. First, managers might exploit their position in the network to attract more information, there would be an information transfer across managers in this case. Second, investment consultants may choose fund managers because they like that manager’s investment style and believe it fits well with the pension fund’s set of managers. In this case no information is transferred from manager to manger, but the consultant networks act as transfer of information.