Asset Managers: Institutional Performance and Smart Betas

Abstract

Institutional investors paid asset managers average annual fees of $172 billion between 2000 and 2012. We show that asset managers outperformed their benchmarks by 96 basis points per year before fees, and by 49 basis points after fees. Estimates from a Sharpe (1992) model suggest that asset managers achieved outperformance through factor exposures ("smart beta"). If institutions had instead implemented a long-only mean-variance efficient portfolio over the same factors via institutional mutual funds, they would have earned just as a high, but no higher, Sharpe ratio as by delegating to asset managers. Liquid, low-cost ETFs are likely eroding the comparative advantage of asset managers. Because asset managers account for 29% of investable assets, the adding-up constraint implies that the average dollar of everyone else had a negative alpha of 49 basis points.