Performance clustering and incentives in the UK pension fund industry

Despite pension fund managers being largely unconstrained in their investment decisions, this paper reports evidence of clustering in the performance of a large cross-section of UK pension fund managers around the median fund manager. This finding is explained in terms of the predominance of a single investment style (balanced management), the fee structures and incentives operating in the UK pension fund industry to maximise relative rather than absolute performance, the high concentration in the UK pension fund industry and the low turnover of fund managers. Fund size appears to be the only variable that can account for an important fraction of the cross-sectional variation in measured performance.