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Decentralized Investment Management:Evidence from the Pension Fund Industry

David Blake, Alberto Rossi, Allan Timmermann, Ian Tonks, and Russ Wermers

Using a unique dataset, we document two secular trends in the shift from centralized to decentralized
pension fund management over the past few decades. First, across asset classes, sponsors
have replaced generalist balanced managers with better-performing specialists. Second, within asset
classes, funds have replaced single managers with multiple competing managers following diverse
strategies to reduce diseconomies-of-scale as funds grow larger, relative to capital markets. Consistent
with a model of decentralized management, sponsors implement risk controls that trade o higher
anticipated alphas of multiple, specialist managers with the increased diffculty in coordinating their
risk-taking and greater uncertainty concerning their true skills.

JEL: G11, G23

Key words: decentralized investment management, diversi cation loss, coordination problems,
fund manager skill, pension funds