Finding the Informed: How Public Pension Funds Choose Asset Managers

Abstract

This paper examines how public pension funds (PPFs) search for and hire asset managers. First, I extend a model where PPFs can choose asset managers directly, through an informed consultant, or through a random consultant. The model shows that as the consultant search cost decreases, the number of PPFs who seek informed consultants increases, and the number of consultants who choose to become informed increases. Second, I examine a dataset of asset manager finalists and winners for mandates released by US PPFs between 2009 and 2018. The data show that previous finalists and winners are more likely to be reselected in future mandates. However, finalists do not have an equal likelihood of winning, and certain firms appear to be consistently selected as finalists, but not as winners. The empirical findings confirm the central role of consultants, but question the merit of the shortlisting process.