Scale Economies in Pension Fund Investments: A Dissection of Investment Costs Across Asset Classes

Does it pay to pay performance fees? Empirical evidence from Dutch pension funds

“…The authors conclude that it is more cost-effective to directly invest in hedge funds (instead of through a funds of funds strategy) above USD 200 million. several asset classes that pension funds invest in (Broeders et al, 2016). The observed economies of scale are in line with academic evidence for the mutual fund sector (Malkiel, 2013;Indro, Jiang, Hu and Lee, 1999).…”

“…The observed economies of scale are in line with academic evidence for the mutual fund sector (Malkiel, 2013;Indro, Jiang, Hu and Lee, 1999). Moreover, the economies of scale in the pension fund industry appear primarily driven by management costs, and not by performance-based fees (Broeders et al, 2016). For equities, private equity and hedge funds, Broeders et al (2016) find that larger Dutch pension funds pay higher performance fees than their smaller counterparts.…”

“…For fixed income securities, we can also differentiate between credit rating classes. In addition, we use other pension fund-specific variables in the analysis, including pension fund size (assets under management), asset class size and the level of specialization in the investment portfolio (see Broeders et al, 2016).…”

“…Moreover, the economies of scale in the pension fund industry appear primarily driven by management costs, and not by performance-based fees (Broeders et al, 2016). For equities, private equity and hedge funds, Broeders et al (2016) find that larger Dutch pension funds pay higher performance fees than their smaller counterparts. In addition, there are many papers promoting full transparency of institutional investors regarding their investment costs (Keim and Madhavan, 1998;Barber, Odean and Zheng, 2005).…”

“…There is a vast literature on whether pension funds are able to outperform their benchmarks (e.g., Lakonishok, Shleifer, Vishny, 1992;Coggin, Fabozzi and Rahman, 1993;Blake, Lehmann and Timmermann, 1999;Andonov, Bauer and Cremers, 2011). And there are also papers on the investment cost structure of pension funds (e.g., Bikker and De Dreu, 2009;Frehen, 2010, Broeders, van Oord andRijsbergen, 2016). However, to the best of our knowledge there are no papers that examine the relation between performance fees and the net investment performance of pension funds.…”