The investment gatekeepers who help control $25 trillion of institutional money have trouble figuring out who is and who isn't good at money management.

Investment consultants, who play a key role advising pension funds, charities and endowments, actually choose managers who end up lagging those whom they pass over, according to a new study.

“We find no evidence that consultants’ recommendations add value to plan sponsors,” write Tim Jenkinson and Howard Jones of the University of Oxford and Jose Martinez of the University of Connecticut, whose paper last week won the Commonfund Prize, an annual award for research into foundation and endowment management. (

Investment consultants help institutional fund trustees, who are usually not professional money managers, on a variety of issues, from choosing managers to asset allocation to modeling assets and liabilities. It is a huge industry, advising $25 trillion, and a highly concentrated one. The top 10 consultants, including Mercer, Towers Watson and Russell Investments, have estimated global market share of 82 percent.

The study focused on actively managed U.S. equity funds, looking at institutional funds of about $3 trillion and surveys of consultant recommendations over 13 years. The upshot: funds recommended by consultants return, on average, 1.12 percentage points less per year on an equally weighted basis than those not recommended.

On the face of it, that is pretty damning.

It certainly is not what trustees think they are paying for. In a 2011 survey in Pensions & Investments when plan sponsors were asked where they thought consultants were adding the most value, the single largest response, from 27 percent, was “money manager search/selection.”

To be sure, there are a host of "yes, but's" here. U.S. equity is one of the largest and, presumably, most efficient markets. It is possible that consultants are better able to add value in emerging markets or high-yield bonds, for example. It is also notable that consultants seem to favor larger funds, perhaps because they can take on large allocations for huge pension funds or perhaps because they have client service or investment process offerings not available among smaller funds. Larger funds have a documented tendency to lag smaller ones in performance.

The study did look at why consultants recommend given funds and found that they were not simply chasing the best performance. While performance plays a role in selection it is actually outweighed by 'soft' factors, according to the study, such as service and investment process. It might possibly be that those investment process issues mean that chosen funds are less likely to suffer large meltdowns and are thus to be preferred. That’s possible, but wasn’t reflected in the 13 years of data.

Those other soft factors definitely have a value, as any client of a private bank will tell you.