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The impact of agency costs on the investment performance of Australian pension funds

Published online by Cambridge University Press:  23 August 2006

ANTHONY D. F. COLEMAN
Affiliation:
Australian Prudential Regulation Authority (APRA)
NEIL ESHO
Affiliation:
Australian Prudential Regulation Authority (APRA)
MICHELLE WONG
Affiliation:
Australian Prudential Regulation Authority (APRA)

Abstract

This paper evaluates the overall investment performance of Australian pension funds by examining the determinants of risk-adjusted performance, and the relationship between risk, returns, and expenses. Using quarterly return data for 225 pension funds comprising 68% of total prudentially regulated pension fund assets, we find significant differences exist across fund types. On both a net return and risk-adjusted performance basis, not-for-profit funds significantly outperformed for-profit funds over the seven years to June 2002. We suggest that the performance difference is consistent with the hypothesis that agency costs in for-profit funds (due to non-representative trustee board structures and potential board member conflicts of interest) are greater than agency costs in not-for-profit funds (with representative trustee boards).

Type
Research Article
Copyright
2005 Cambridge University Press

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Footnotes

The views and opinions expressed in this paper are those of the authors and do not necessarily reflect those of APRA. The authors would like to thank Anthony Asher, Bob Allen, Greg Brunner, Wayne Byres, Merrie Hennessy, Ross Jones, Charles Littrell, and Ian Sharpe for helpful comments and suggestions. Remaining errors and omissions are our own.