CMA analysis reinforces view that investors should prioritise strategy over manager selection

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Recently published analysis from the Competition & Markets Authority (CMA), as part of a wider probe into the investment consultancy market, finds little evidence that consultants are able to consistently select outperforming managers.

The findings underscore the fact that asset allocation and strategy should be prioritised over manager selection, according to pensions advisory firm LCP. In fact, the analysis shows that investment consultants have not, on average, selected managers that have outperformed indices or other managers to a statistically significant extent. This is consistent with the findings of a similar 2017 study by the Financial Conduct Authority (FCA).

In addition, none of the individual consultant firms that the CMA analysed has done any better than the industry as a whole. While some consultancies have claimed to be able to pick outperforming managers, the CMA’s initial analysis finds that these claims have either not allowed for fees fully or in some cases are based on selective data.

Clay Lambiotte, partner at LCP, commented: “We understand how hard it is to identify outperforming managers, especially when measured over relatively short periods. In fact, we were up front on this point to the FCA during its initial investigation. This is evidenced, for example, by our approach to selecting managers for standard equity mandates, where we have recommended primarily passively managed products for some time. Across our clients the amount of equity holdings that are managed passively at lower cost and governance is considerably higher than the industry overall.”

“Of course, active management still has an important role to play, particularly in markets where there is no passive management option such as property, private credit and other alternative markets. In areas like these, it is important to find cost effective managers with a high standard of governance, excellent operational controls and the ability to deliver the benefits of that particular investment opportunity to clients.”

“In future, consultants and their clients should focus on what matters most: asset allocation and strategy, especially in classes where passive investing is an effective option. Complex portfolios don’t necessarily deliver better returns or add meaningful diversification. When there is no other option than active, the benefits must be clear and reliable to ensure the higher fees are warranted.”

“Above all, it is imperative that investors focus on decisions which are most critical and impactful. This includes setting appropriate risk budget and return targets, as well as what combination of asset classes best meets those objectives and constraints. This is the area where good investment advice can add enormous value.”