The Case Against Active Pension Funds : Evidence from the Turkish Private Pension System

Using a survivorship and selection bias free database of actively managed private Turkish Pension funds we show that most managers are not able to provide performance above and beyond what could be earned by passive indexing. At its simplest, funds with self-declared benchmarks fail to beat them on average. With respect to a common multi-asset factor model, the fund industry as a whole does not deliver a positive alpha and neither does the average fund. The style analysis of individual funds based on their reported asset allocations reveals that the average manager provides 34 basis points of “selection return” per annum. We also test a naïve trading strategy that invests with the top 10 funds in each year for the subsequent year over the period from 2004 to 2011. We find that this strategy earns about the same return as what one could earn with an equal weighted portfolio of Turkish stocks and government bonds. Taken as a whole, our results strongly support the philosophy of passive investing and highlight the need for low-cost index funds in the Turkish Pension fund system