HOW SHOULD PENSION FUNDS MANAGE RISK?

Despite recent advances in risk management techniques, pension funds are still struggling with the concept of risk and with the practical challenges of managing and measuring it in useful ways. This article addresses this problem by showing that pension fund managers must manage two types of risk that affect a pension fund balance sheet's funded ratio. The most important of the two is asset policy risk, which arises from the choice of an asset mix policy that does not match the accrued pension liabilities. The other risk results from the decision to implement the chosen asset mix using active rather than passive management strategies.
This article shows how both types of risk can be measured and managed through an adapted value at risk (VAR) metric: the funded ratio VAR. A study of the performance of 98 pension funds during the period 1992–1995 shows that the funds were adequately compensated, on average, for taking on the policy risk, but not for implementation risk.     

Active fund management: Global asset allocation funds

We examine the value of active fund management of global asset allocation funds. We use unique daily data and a modified Sharpe's [Sharpe, W., 1992. Asset allocation: management style and performance measurement. Journal of Portfolio Management 18, 7–19] Return-Based Style Analysis method to create a three-index model. We introduce an alternative method derived from Sharpe to calculate attribution returns that measure active fund management performance. Our results suggest that a sample of global asset allocation funds add value for investors. To determine the estimation ability of our model and the implications for estimated asset allocation decisions, we report historical and cross-sectional root mean square errors, which give positive indications of reliability.     

Pension Funds and Emerging Markets

This paper focuses on the investment behavior of pension funds in developed and emerging market countries. First, it analyzes the main determinants of the emerging market asset allocation of pension funds in developed countries. Second, it assesses how pension funds in emerging markets have contributed to the development of local securities markets. Third, it analyzes the determinants of pension funds' investment performance. The paper concludes with a discussion of why the emerging market asset allocation of pension funds in developed countries is likely to increase and what the challenges faced by pension funds in emerging markets are.     

Asset Allocation and Selectivity of Asian Mutual Funds During Financial Crisis

This paper evaluates the ability of US-based Asian mutual fund managers in coping with the 1997 Asian financial crisis. We find that the actively managed mutual funds under-perform with respect to the market portfolio by 1.71% in average monthly return. Such poor performance is caused by fund managers' relative weakness in country selection as well as in stock picking. Fund managers are also found to be more skillful in picking the correct market when the market is going up than going down. Our results are consistent with the literature that asset allocation in Asian mutual funds is a dominating factor relative to selectivity in explaining fund returns during the financial crisis. In addition, there exists a negative relation between asset allocation ability and selectivity of fund managers.     

Corruption,governance, and public pension funds

We examine the effects of state corruption as well as political and governance factors on U.S. public pension funds. We find that pension funds in states with more corruption have lower performance; a one standard deviation increase in corruption is associated with a decrease in annual returns of at least 14 basis points, and this relationship is robust to state-level and pension-level fixed effects. Pensions located in more corrupt jurisdictions also invest a larger fraction of their assets in equities. We find that having a new treasurer decreases the negative effects of corruption, suggesting that more frequent changes in administrations are beneficial in corrupt jurisdictions. Governance-related variables and political affiliation variables are by themselves not significantly related to pension returns, although these variables are associated with differences in asset allocation.     

Asset allocation and portfolio performance: Evidence from university endowment funds

We use university endowment funds to study the relationship between asset allocation decisions and performance in multiple asset class portfolios. Although endowments differ substantially in asset class composition, policy portfolio returns and volatilities are remarkably similar across the sample. The risk-adjusted performance of the average endowment is negligible, but actively managed funds generate significantly larger alphas than passive ones. This is consistent with endowment managers exploiting their security selection abilities by over-weighting asset classes in which they have superior skills. Contrary to both theory and prevailing beliefs, asset allocation is not related to portfolio returns in the cross-section but does indirectly influence performance.     

Gender,style diversity,and their effect on fund performance

This paper examines the performance of 358 European diversified equity mutual funds controlling for gender diversity. Fund performance is evaluated against funds’ designated market indices and representative style portfolios. Consistently with previous studies, proper statistical tests point to the absence of significant differences in performance and risk between female and male managed funds. However, perverse market timing manifests itself mainly in female managed funds and in the left tail of the returns distribution. Interestingly, at fund level there is evidence of significant overperformance that survives even after accounting for funds’ exposure to known risk factors. Employing a quantile regression approach reveals that fund performance is highly dependent on the selection of the specific quantile of the returns distribution; also, style consistency for male and female managers manifests itself across different quantiles. These results have important implications for fund management companies and for retail investors’ asset allocation strategies.     

Allocation of decision rights and the investment strategy of mutual funds

The literature suggests that while decentralized decision making can allow for greater specialization in an organization, it heightens the cost of coordinating decisions. The mutual fund industry—in particular, sole- and team-managed balanced funds—provides an ideal setting to test the specialization versus coordination trade-off, as information on decision structures and fund actions is easily obtained. We show that sole-managed balanced funds, with centralized decision rights, exhibit significant market timing that requires reallocation across asset classes. However, consistent with coordination difficulties between managers specializing in particular asset classes, no market timing is evident in team-managed balanced funds. Team-managed funds exhibit greater returns from specialization, in the form of better security selection performance than sole-managed funds. These results hold cross-sectionally and for funds that switch management structures. The overall returns across different management structures are similar, indicating a market equilibrium. Investor flows reward market-timing performance for sole- but not team-managed funds.     

Market timing: A global endeavor

This paper employs daily fund and index data, the classical Treynor and Mazuy timing model, and two multi-factor extensions to measure the market timing ability of global asset allocation funds. These funds differ from traditional global or international funds in that they face fewer investment constraints and are known to actively shift funds across a wide variety of asset classes. When using the classical Treynor and Mazuy timing models, I find evidence of poor market timing ability. However, this evidence disappears when timing ability is examined using two multi-factor models. The results from Treynor and Mazuy are spurious since both multi-factor extensions do a much better job in explaining the variation in average fund returns.     

Excess Asset Reversions and Shareholder Wealth

The ownership of pension assets in a defined benefit pension plan is an unresolved issue in corporate finance. The issue is important because it defines the appropriate investment policy for a pension fund. In this paper, we summarize the ownership debate in the form of two mutually exclusive theories. We then focus on a recently popular event in pension finance, excess asset reversions. Our paper demonstrates the valuation effects associated with this event in a stochastic dominance framework. Under certain conditions, a reversion constitutes an expropriation of wealth from the participants and beneficiaries of the plan to the firm. Using data provided by the Pension Benefit Guaranty Corporation and the Center for Research in Security Prices tape, we examine the returns to the shareholders of 58 companies which conducted excess asset reversions between 1980 and 1984. Our results show that large abnormal returns accrued to these shareholders around the time of the reversion. These findings have implications both for the appropriate investment policy of pension funds and for public policy with respect to plan terminations.     

The Performance,Asset Allocation,and Investment Style of International Equity Managers

This paper evaluates the performance of 114 international equity managers over the January 1988–December 1997 period. Performance tests are conducted using Sharpe (1966) and Jensen (1968) performance methodologies. The managers are divided into mutual fund (n=54) and separately managed fund (n=60) investment management categories. Each management category is further divided by foreign and world (global) investment objectives. Three major findings are reported. First, international equity managers, on average, were unable to outperform the MSCI World market proxy during the sample period. However, world managers did perform better than their foreign counterparts. Second, geographic asset allocation and equity style allocation decisions enhanced the performance of international managers during the sample period. Third, separately managed funds outperformed mutual funds during the period studied when mutual fund returns are measured net of management fees. The apparent managed performance advantage abates, however, when mutual fund returns are adjusted to include management fees. Thus, we find no significant difference in the performance of the management categories when returns are measured gross of fees.     

A dynamic model of active portfolio management with benchmark orientation

This paper studies optimal dynamic portfolios for investors concerned with the performance of their portfolios relative to a benchmark. Assuming that asset returns follow a multi-linear factor model similar to the structure of Ross (1976) [Ross, S., 1976. The arbitrage theory of the capital asset pricing model. Journal of Economic Theory, 13, 342–360] and that portfolio managers adopt a mean tracking error analysis similar to that of Roll (1992) [Roll, R., 1992. A mean/variance analysis of tracking error. Journal of Portfolio Management, 18, 13–22], we develop a dynamic model of active portfolio management maximizing risk adjusted excess return over a selected benchmark. Unlike the case of constant proportional portfolios for standard utility maximization, our optimal portfolio policy is state dependent, being a function of time to investment horizon, the return on the benchmark portfolio, and the return on the investment portfolio. We define a dynamic performance measure which relates portfolio’s return to its risk sensitivity. Abnormal returns at each point in time are quantified as the difference between the realized and the model-fitted returns. Risk sensitivity is estimated through a dynamic matching that minimizes the total fitted error of portfolio returns. For illustration, we analyze eight representative mutual funds in the U.S. market and show how this model can be used in practice.     

Which institutional investor types are the most informed?

We examine the informativeness of quarterly disclosed portfolio holdings across four institutional investor types: hedge funds, mutual funds, pension funds and private banking firms. Overweight positions outperform underweight positions only for hedge funds. By decomposing holdings and stock returns, we find that hedge funds are superior to other institutional investors both at picking industries and stocks and that they are better at forecasting long‐term as well as short‐term returns. Furthermore, our results show that hedge funds, mutual funds and pension funds are able to successfully time the market. The outperformance of hedge funds is not explained by a liquidity premium.     

Investor sophistication and risk taking

Using investment policy data of 857 Dutch pension funds during 1999–2006, we develop three indicators of investor sophistication. The indicators show that pension funds’ strategic portfolio choices are often based on coarse and less sophisticated approaches. First, most pension funds round strategic asset allocations to the nearest multiple of 5%, similar to age heaping in demographic and historical studies. Second, many pension funds invest little or nothing in alternative, more complex asset classes, resulting in limited asset diversification. Third, many pension funds favor regional investments and as such do not fully employ the opportunities of international risk diversification. Our indicators are correlated with pension fund size, in line with the expectation that smaller pension funds are generally less sophisticated than large pension funds. Using the indicators for investor sophistication, we show that less sophisticated pension funds tend to opt for investment strategies with less risk.     

Deconstructing Herding: Evidence from Pension Fund Investment Behavior

In this paper, we examine herding across asset classes and industry levels. We also study what incentives managers at various layers of the financial industry face when investing. To do so, we use unique and detailed monthly portfolios between 1996 and 2005 from pension funds in Chile, a pioneer in pension-fund reform. The results show that pension funds herd more in assets that have more risk and for which pension funds have less market information. Furthermore, the results show that herding is more prevalent for funds that narrowly compete with each other, namely, when comparing funds of the same type across pension fund administrators (PFAs). There is much less herding across PFAs as a whole and in individual pension funds within PFAs. These herding patterns are consistent with incentives for managers to be close to industry benchmarks, and might be also driven by market forces and partly by regulation.     

基金网络能够提高投资绩效吗？

基金网络在金融市场的信息流动中发挥着重要作用。本文利用基金共同持股关系构建了一个有效的基金网络数据集,以中国资本市场股票型基金2005-2018年季度数据为研究样本,考察基金网络是否以及如何影响投资绩效。结果表明,基金在基金网络中越处于网络中心地位,基金的投资绩效越高。使用基金家族网络作为工具变量缓解内生性偏误后,基金网络仍然对投资绩效具有显著的正向影响。进一步地,本文考察了基金网络影响投资绩效的渠道,结果表明,基金网络主要通过提高基金的选股技能、资产配置技能和管理技能影响投资绩效。最后,本文考察了基金网络对基金市场份额的影响,研究发现基金网络会显著提高基金的市场份额,对基金在市场上的占有率有积极的正向影响。     

Die Abgrenzung beitragsbezogener Pensionspläne aus Sicht des Asset-Liability-Managements

As a first step towards establishing models for the asset liability management (ALM) of contribution based pension plans of German pension funds it is important to characterize the essential properties of such plans. It is shown that it is not appropriate to assume an equivalence between such plans and a ?Beitragszusage mit Mindestleistung” (contribution based pension plan with investment guarantee). Although the plans under consideration grant the participation in the asset returns generated by the pension fund, they also guarantee a benefit level. This shows clearly that it is impossible to apply traditional ALM models for defined contribution plans — which in general provide no minimum benefit guarantee — to German pension funds without substantial alterations.     

Análisis del riesgo de mercado de los fondos de pensión en México Un enfoque con modelos autorregresivos

The aim of this paper is to analyze the market risk of two types of investment funds, Basic SIEFORE 1 (SB1) and Basic SIEFORE 2 (SB2). To do this, we propose a performance index that will be used in ARIMA-GARCH models and some of its extensions, with the purpose of examining the dynamic behavior of the returns and their volatility on such investment funds. Moreover, the risk premium of both types of funds is analyzed. One of the relevant research results is that yields obtained by these funds in the period studied, are not sufficient to offset the additional risk assumed by the pension funds including equity components. Finally, some remarks are made, on investment policy, about the market risk and how it is being measured and managed in these funds.     

Scale economies in pension fund investments: A dissection of investment costs across asset classes

Using a unique dataset of 225 Dutch occupational pension funds with a total of 928 billion euro of assets under management, we provide a comprehensive cross-sectional analysis of the relation between investment costs and pension fund size. Our dataset is free from self-reporting biases and decomposes investment costs for 6 asset classes in management costs and performance fees. We find that a pension fund that has 10 times more assets under management on average reports 7.67 basis points lower annual investment costs. Economies of scale differ per asset class. We find significant economies of scale in fixed income, equity and commodity portfolios, but not in real estate investments, private equity and hedge funds. We also find that large pension funds pay significantly higher performance fees for equity, private equity and hedge fund investments.     

What is the impact of wealth shocks on asset allocation?

I test the assumption of constant relative risk aversion using U.S. macroeconomic data and analyse the role of wealth shocks in generating transitory changes in asset portfolio composition. I show that the risky asset share exhibits cyclical behavior and it is significantly (and positively) affected by unexpected variation in wealth. Therefore, the empirical evidence suggests that risk aversion is counter-cyclical. I also find that the portfolio share of housing wealth falls when the agent is faced with a positive wealth shock, i.e. housing is a hedge against unfavorable wealth fluctuations. Finally, considering a variety of wealth definitions, the results show that: (i) wealth effects are stronger for direct holdings of risky assets than for indirect holdings, which highlights that investors do not typically trade some assets such as pension or mutual funds; (ii) although significant, wealth effects on asset allocation are mainly temporary as agents quickly rebalance the asset portfolio composition (i.e. there is weak evidence of inertia or slow adjustment in asset allocation); and (iii) changes in expected returns partially explain the variation in risky asset allocation.