Many find fault with paper critical of consultants

The paper — “Picking Winners? Investment Consultants' Recommendations of Fund Managers” — asserts that consultants' recommendations of money manager strategies are not driven by investment performance, and instead are based largely on “soft factors,” such as “clear decision-making, capable portfolio management and consistent investment philosophy.”

The authors were unable to find evidence that recommendations based on those factors added any particular performance-based value, suggesting the search for winners is “fruitless.”

“They (consultants) may be adding value through the other decisions they help plan sponsors with, they just fail to do it in this particular decision: which asset manager to hire for a particular mandate,” in this case, active U.S. equities, said Jose Martinez, assistant professor of finance, University of Connecticut School of Business and co-author of the paper, which won the annual $10,000 Commonfund Prize this year.

But investment consultants and asset owners interviewed for this story cry foul.

Michael A. Rosen, a principal and chief investment officer at investment consultant Angeles Investment Advisors LLC, Santa Monica, Calif., said the questions clients should be asking are: “Over time, has the fund performed better than its benchmark? Has it done so with less risk? Has the manager achieved their objectives?”

“If so, then the consultants provide considerable value,” Mr. Rosen said.

He also said consultant recommendations being driven largely by soft factors rather than performance, is by design and is “a good thing.”

“Past performance is a poor indication of future results because performance can be affected by many complex factors, some of which are random or difficult to control or anticipate,” he said after reading the paper.

When asked to comment on the paper, Michael G. Trotsky, executive director and CIO of the $61 billion Massachusetts Pension Reserves Investment Management board, Boston, echoed the sentiment that consultants shouldn't choose investment strategies based on past performance.

“Past alpha generation has absolutely zero predictive ability for future performance,” said Mr. Trotsky. 

story continues: http://www.pionline.com/article/20150420/PRINT/304209989/many-find-fault-with-paper-critical-of-consultants