29 March 2023 Financial Analysts Journal Volume 79, Issue 2

Forbearance in Institutional Investment Management: Evidence from Survey Data

  1. Amit Goyal
  2. Ramon Tol
  3. Sunil Wahal
External asset managers are often fired for poor performance, but a surprising amount of tolerance for underperformance also exists. To understand the drivers of such forbearance, the authors surveyed major institutional investors around the world.
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We survey 218 institutional investors from 22 countries representing over $4.1 trillion in AUM to understand the drivers of forbearance in the termination of external asset managers. Although asset managers are fired for a variety of reasons, including taking on too much or too little risk as well as organizational changes at the investment manager or institutional investor level, poor performance is by far the dominant cause. There is surprising tolerance for underperformance and holding periods for investment managers are unexpectedly long. Forbearance is important and we argue that performance evaluation should be multifaceted, akin to a Bayesian decision-maker who conducts continued due diligence and updates beliefs about returns with process information.

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