1. 1 XIX. Money Management Industry

2. 2 Money Management Industry Study of pension fund money managed by professionals: Insurance companies, bankers and trust companies, and investment counselors Why Study 1.Professionals on both sides – one on one relationships corporate treasurer not individual purchaser of service Service often custom designed by seller, e.g. bank 2.No tax impediments to decision making Disadvantages of Study Data not all in public domain (suspect)

3. 3 Strength of Study Great institutional insight Weakness Naïve evaluation tools

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5. 5 Data for Study – SEI – 2 data bases I.Performance Data base – 769 All Equity Pension Funds, 1983-1989 for study. Initiated by plan sponsor – sponsor asks SEI to monitor a fund and pays for it. If sponsor fires manager or stops using SEI fund disappear Data is quarterly returns, managers investment style, end of quarter holding Bias – put in when plan sponsor uses – probably after period whose fund did well – add past data when put in – when sponsor drops (probably because did poorly get rid of data base).

6. 6 II. Search Data Base – Used by sponsors to pick money managers SEI selects among managers to include based on good track record and size (money under management). Drop if really bad or because very small. Data is on management firm not on a pension fund. 250 firms at end of 1990. Past data on returns – lots of data on management firm but only as of 1990. Bias – really serious – pick successful firms that are large – though reluctant to drop firms do if really bad performance or because very small All of the barriers in both data bases should lead us to overestimate the success of money managers.

7. 7 Reasons that the study should make active managers look good 1.Upward bias in data base* 2.Looks at return before fees (overstate by about 50bp) 3.Excludes cash

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18. 18 Growth and Performance N = 8.09 + 1.85 RR (7.97) (7.38) RR = average 3 year return N = number of new accounts in next year Management fees – very slight tendency for good performance to be associated with higher fees. Five year averaging 300 bp per year translates to 5 to 6 basis points increase in fees.