Decentralised Portfolio Management: Analysis of Australian Accumulation Funds

In Australia, pension fund trustees choose investment managers on behalf of members. We investigate the structure and performance of delegated investment choice in the Australian retirement incomes sector. We find that funds where trustees employ many managers generate higher risk-adjusted returns over the 3 year sample than those with few, but funds with 13 or fewer managers show no improvement over funds with a single diversified manager. All do worse than a benchmark portfolio of asset class indices. Random selection mimics the choices of an uninformed individual selecting from a 401K plan or retail superannuation fund menu. Returns from funds with large numbers of mandates compare favourably with returns from randomly selected equally weighted portfolios, but this improvement falls off quickly for funds with fewer mandates, or when naive portfolios are diversified across asset classes. Results indicate that an uninformed individual following a naive diversification strategy does as well as most funds in this sample.