BIS report highlights asset managers’ role in inefficient markets

The CGFS’s tentative findings – based on interviews with nearly 50 investors - were published today by the Bank for International Settlements (BIS). The committee found the prevalence of management against benchmark indexes in combination with typical compensation structures - that are determined by average assets under management - could “contribute to a loss of institutional asset managers’ ability to serve as a market control mechanism". For example, tightening of allowable tracking errors could discourage managers from taking contrarian positions, the CGFS said.

Also, investment performance benchmarks tend to be chosen from a limited number of market indexes, and this could give rise to a herd mentality among investors. Some managers believe a collective underperformance that includes themselves alongside their peers is preferable to being 'singled out' after a contrarian position fails to perform in the short term, according to the CGFS.

The CGFS’s working group on incentive structures in institutional asset management conducted the research. The committee decided to set up the working group back in September 2001. Bank of France’s Michel Cardona is currently chairman of the group.

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