Pension funds and other asset owners could be running big risks because of delays when implementing changes to their asset allocation, according to a study by State Street.

The financial services company said it took these investors an average of 23 days between their first enquiry to a third party to change an investment and the actual implementation.

The study analysed 6,000 transition “events” over nine years to come up with the data, and termed the problem “event shortfall” — to include portfolio shortfall as well as implementation shortfall.

This delay in putting the desired new investment in place — sacking an active manager for poor performance or changing investment strategy for asset/liability reasons, for example — meant that with markets as volatile as they are now, these investors could be risking 3.5% of returns.

The firm based this on the fact that 23 days tracking error between US and UK equities was 3.5%.

However, it pointed out that this average of 23 days — the period of appointing a transition manager — was only a proportion of the actual time taken to organise a change of investments.

Steve Webster, State Street’s head of portfolio solutions sales, EMEA, said: “At the moment as an industry we only see a small part of these risks at the end of these change periods.”

While 23 days was the average, in one in six cases, the delay was between three to six months, according to the study.

The firm said evidence also suggested the protracted delay in terminating an active manager for poor performance may carry higher risks given current performance statistics.

Some 80% of actively managed European equity portfolios and 85% of US large cap equities had underperformed their benchmark in 2014, it said, citing Le Temps and Lipper data respectively.

“As soon as that decision’s been changed, the mandate has been changed […] investors should act at that point in time and not leave these changes to a later point,” said Webster.

“What if a pension fund was to make those changes and then there was a market shock? That would then be a risk against an un-mandated portfolio,” he said.

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