Rewarding good market selection

I'll be brief tonight, as it's been a long day and I haven't had a chance to think deep thoughts.

I spent the day in the City of London, as guest of one of our investment advisor firms. They were educating us about interest rate swaps and inflation swaps—financial tools that UK pension funds are increasingly employing.

But perhaps the most intriguing nugget emerged from a discussion in the morning: our equity fund managers don't get directly rewarded for good performance—e.g. a financial incentive for exceeding the benchmark for that asset class. The reward they get is the continuation of their contract with our pension fund. But, unless the manager's performance is absolutely appalling, it tends to take at least three years to collect enough data to indicate that the manager should be sacked.

I guess this shows what a random process stock-picking is assumed to be. So, nothing like market selection in the world of business strategy, then ...