Key Takeaways
- • A study by Lucia Spotorno and Giacomo Nocero (2026) of Italian occupational pension fund separately managed accounts (SMAs) from 2003 to 2023 finds that relative underperformance versus the benchmark is the main driver of manager termination.
- • Outperformance versus the benchmark does not meaningfully reduce the probability of being fired, making the SMA mandate a "heads, I win, tails, you lose" arrangement for managers, according to Klement on Investing.
- • Managers respond to career risk by lowering portfolio beta below 1.0 and reducing active risk, so pension funds may pay active fees for semi-active portfolios.
- • Managers split across multiple mandates behave even more defensively because they are easier to replace, and performance fees make up only a small share of total fees because they do little to change behaviour.
Summary
A recent analysis of separately managed accounts (SMAs) in Italy, drawing on a hand-collected dataset of Italian occupational pension funds over 2003 to 2023, offers a rare view of career risk in fund management, according to Klement on Investing. Because SMAs are private mandates, their data are typically unavailable, but their simple structure, with one manager serving one client against a clear objective, allowed researchers Lucia Spotorno and Giacomo Nocero to isolate the factors behind a pension fund's decision to replace a manager or terminate an SMA.
The study finds that relative performance is the key driver of termination. Underperformance against the benchmark significantly and quickly raised the probability that a pension fund would fire the manager. Outperformance, however, did not reduce that probability, leaving managers with asymmetric downside exposure.
Faced with this incentive structure, managers prioritise avoiding losses. They tend to lower portfolio beta below 1.0 so that they lose less than the benchmark in bear markets, and they reduce active risk to stay close to benchmark returns. The article notes that this leaves pension funds paying active fees for what are effectively semi-active portfolios. The behaviour is more pronounced when a mandate is split among several managers, since each is easier to replace when another manager can take over the portfolio with little friction.
Performance fees do little to alter this behaviour, the analysis suggests, because they are uncertain and career risk dominates managers' decisions. As a result, performance fees represent only a small fraction of total fees paid, since managers run these accounts more defensively than the market.
The study finds that relative performance is the key driver of termination. Underperformance against the benchmark significantly and quickly raised the probability that a pension fund would fire the manager. Outperformance, however, did not reduce that probability, leaving managers with asymmetric downside exposure.
Faced with this incentive structure, managers prioritise avoiding losses. They tend to lower portfolio beta below 1.0 so that they lose less than the benchmark in bear markets, and they reduce active risk to stay close to benchmark returns. The article notes that this leaves pension funds paying active fees for what are effectively semi-active portfolios. The behaviour is more pronounced when a mandate is split among several managers, since each is easier to replace when another manager can take over the portfolio with little friction.
Performance fees do little to alter this behaviour, the analysis suggests, because they are uncertain and career risk dominates managers' decisions. As a result, performance fees represent only a small fraction of total fees paid, since managers run these accounts more defensively than the market.
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