The efficiency of Greek public pension fund portfolios

Greek public pension funds can invest up to 23% into risky assets and are not allowed to invest outside Greece. This paper seeks to investigate the costs of investment constraints on pension fund portfolios. In particular we try to quantify the losses that portfolios suffer due to under-diversification and sub-optimal asset allocation. We find that the high concentration of Greek equity portfolios imposes a substantial return and utility loss which is further increased when the lack of international diversification is taken into account. Restricting the weight of equities to 23% of the total portfolio, leads to sub-optimal asset allocation that costs as much as 2% (3%) per annum compared to a balanced domestic (global) benchmark.     

The relationship between pension funds and the stock market: Does the aging population of Europe affect it?

In recent decades, pension fund investment has increased rapidly because of population aging and growing doubts about the viability of western public pension systems. As a result, pension funds have become dominant in stock markets. This paper examines the influence of the pension fund assets invested in equities on stock market development and the market efficiency of 13 European countries, from 1999 to 2014. Our results vary by country, by pension model and among the one-model countries. Nevertheless, revealing a concern about saving for retirement. Finally, our efficiency analysis reveals that the influence of pension funds varies over time and across markets, due to arbitrage opportunities that provoke adaptive managerial strategies.     

A COMPARISON OF INDEXING AND BETA AMONG PENSION AND NONPENSION ASSETS

In this article I contrast the investment behavior of institutional portfolios having pension assets with portfolios having nonpension assets. Differences in incentive compensation plans and regulation give pension executives unique incentives to track benchmark indices. Accordingly, pension assets are more likely than nonpension assets to be allocated to index funds. Also, portfolios composed of pension assets are more likely than other portfolios to (i) have low tracking error in absolute value, (ii) be index funds, and (iii) have market betas close to one. Portfolios with relatively large pension asset market share exhibit similar characteristics and the tendency to index increases with asset class risk. Actively managed pension assets are also more likely to be invested in lower risk asset classes than actively managed nonpension assets.     

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.     

Dynamic preferences for popular investment strategies in pension funds

In this paper, we characterize dynamic investment strategies that are consistent with the expected utility setting and more generally with the forward utility setting. Two popular dynamic strategies in the pension funds industry are used to illustrate our results: a constant proportion portfolio insurance (CPPI) strategy and a life-cycle strategy. For the CPPI strategy, we are able to infer preferences of the pension fund’s manager from her investment strategy, and to exhibit the specific expected utility maximization that makes this strategy optimal at any given time horizon. In the Black–Scholes market with deterministic parameters, we are able to show that traditional life-cycle funds are not optimal to any expected utility maximizers. We also prove that a CPPI strategy is optimal for a fund manager with HARA utility function, while an investor with a SAHARA utility function will choose a time-decreasing allocation to risky assets in the same spirit as the life-cycle funds strategy. Finally, we suggest how to modify these strategies if the financial market follows a more general diffusion process than in the Black–Scholes market.     

An analysis of risk-taking behavior for public defined benefit pension plans

This paper presents the first comprehensive study on the determinants of public pension fund investment risk and reports several new important findings. Unlike private pension plans, public funds undertake more risk if they are underfunded and have lower investment returns in the previous years, consistent with the risk transfer hypothesis. Furthermore, pension funds in states facing fiscal constraints allocate more assets to equity and have higher betas. There also appears to be a herding effect in that CalPERS equity allocation or beta is mimicked by other pension funds. Finally, our results suggest that government accounting standards strongly affect pension fund risk, as higher return assumptions (used to discount pension liabilities) are associated with higher equity allocation and portfolio beta.     

Why should the portfolios of mandatory,private pension funds be captive? (The foreign investment question)

A model of portfolio optimization, which takes account of the difference between the private and social cost of foreign investment, is used to analyze the relationship between capital shortages and the international diversification of mandatory, private pension funds in developing and transition countries. The socially optimal rate of foreign portfolio investment may be positive, even when access to international capital markets is limited. I propose replacing investment limits with a tax on foreign investments, equal to the difference between their social and private cost. The use of international pension swap is seen to be formally equivalent to the imposition of such a tax.     

International Equity Asset Classes in the Turkish Fund Industry

We examine Turkish fund portfolios and identify the role of international investments in their formation. We find that (1) Turkish funds hold a very small fraction of international assets during 1987-2008, (2) the weight of international equity in the funds with an international mandate is smaller than the total weight of domestic asset classes as of 2009, and (3) international stock holdings of Turkish portfolio managers show significant similarity, which can be explained by the fact that the managers tend to hold stocks with which they are familiar. We compare the performance of funds that have the international investment objective with benchmark portfolios and provide suggestions for more diverse funds in the Turkish fund industry.     

Equity risk versus retirement adequacy: asset allocation solutions for KiwiSaver

New Zealand's KiwiSaver superannuation system operates with a conservatively low asset allocation towards equity investments. Evidence suggests ‘conservative’ portfolios are riskier than portfolios holding more growth assets when considering shortfall risk. This study employs stochastic simulation to determine the optimal asset allocation to improve the balance of probabilities for retirement adequacy. The findings show that KiwiSaver default funds are excessively conservative, preventing investors from reaching their retirement goals. Increasing the asset allocation to equities across the range of available KiwiSaver funds is the only solution to significantly improve retirement adequacy in New Zealand given the low contribution rates observed.     

Socially responsible investment in Japanese pensions

As the level of retirement-related assets has grown, so too has public and private interest in so-called “Socially Responsible Investment” (SRI), an investment strategy that employs criteria other than the usual financial risk and return factors when selecting firms in which to invest. This study evaluates whether SRI indices would alter portfolio risk and return patterns for the new defined contribution pension plans currently on offer in Japan. We conclude that SRI funds can be included as an option, albeit with some cost; consequently, mandatory investment in SRI portfolios cannot reasonably be justified.     

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.     

Individual home bias,portfolio churning and performance

This study investigates economic consequences of individual investors’ home bias and portfolio churning in their personal pension accounts. The empirical analysis is carried out within a Heckman style two-stage framework to account for selection bias with respect to individuals’ investment activity, and to allow for an endogenously determined home bias, portfolio churning and performance. Results indicate that home bias induces a worse risk-adjusted performance. Home-biased individuals’ relatively bad performance originates in insufficient risk-reduction, due to a lack of international diversification. A higher degree of portfolio churning also deteriorates performance, despite the fact that churning is not associated with any direct transaction costs. However, home-biased individuals do not churn portfolios as often as individuals with a larger share of international asset holdings, which diminishes the negative effects of home bias on performance. Overconfidence is driven by a return-chasing behavior, where overconfident individuals favor international assets with high historical returns. Individuals with actual skill are more often men than women, are not tempted by high historical returns, and use international assets for the right reason – diversification.     

现代投资组合新视角:对冲基金配置的理论与实证研究

本文在分析传统的投资对冲基金组合架构存在不足的基础上,提出了新的资产组合构架模型,并从理论上论证了对冲基金为何不是一个纯粹超额收益的制造者而更多是一个风险溢价的提供者以及将对冲基金与传统资产有机整合到一起的好处。然后用Cornish—Fisher伸展式对新的资产组合进行分析,证明了新架构的合理性,并用欧美市场的数据进行实证检验。本研究为对冲基金投资者提供了新的操作范式。     

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.     

International capital market equilibrium with investment barriers

This paper outlines models of capital market equilibrium when there are explicit barriers to international investment in the form of a tax on holdings of assets in one country by residents of another country. There is a corresponding subsidy on short positions in foreign assets. Asset prices deviate from the predictions of the world capital asset pricing model. Investors do not hold a mixture of national market portfolios, but the mix of risky assets is the same for every investor in a country. Optimal portfolios tend to be heavy in domestic assets, and light in foreign assets. Tax free investors, however, tend to hold assets anywhere in the world that are taxed heavily. Estimates of the magnitude of the average tax (or the magnitude of effective barriers to international investment) can be made by comparing the average return on the minimum variance zero β portfolio, z, with the average across countries and time of the short-term interest rate. When barriers are ineffective, the expected return on portfolio z will be the average short-term interest rate, and the world capital asset pricing model will hold.     

Forced retirement risk and portfolio choice

Current literature on the effect of labor income on portfolio choice overlooks that workers face a risk of being forced to retire before their planned retirement age. Using data from the Health and Retirement Study, this paper finds that the forced retirement risk is both significant and highly correlated with stock market fluctuations. Using a life-cycle portfolio choice model, this paper shows that forced retirement risk makes labor income near retirement stock-like. Therefore, contrary to conventional wisdom, those who are still working but near retirement should have a lower share of risky assets in their financial portfolios than retirees do.     

Impact of financial investment on confidence in a happy future retirement

The study examines the impact of financial investment on the individual's confidence in a happy future retirement using data from 735 respondents in the Bank Consortium Holding Limited (BCT) Public Opinion Survey on Retirement Happiness in 2017. The result shows that holding the investment portfolio with savings and risky assets positively and significantly correlates with the individual's confidence in a happy future retirement life. This relationship is more pronounced for those with a positive attitude toward life, better financial literacy, and voluntary contribution to the retirement account. The result is robust after using the propensity score matching (PSM) approach, placebo test, alternative regression model, and the independent variables and control for additional variables. Further analysis shows that the positive relationship between holding the investment portfolio and the individual's confidence in a happy future retirement life is not driven by individuals' income, assets, and location. This paper provides empirical evidence to guide citizens' investments and improve the pension system to cope with the aging population in Hong Kong.     

The real risk in pension forecasting

The purpose of this paper is to shed light on some of the flaws in the forecasting approach undertaken by the pension industry. Specifically, it considers the treatment of inflation and shows that the current modeling framework is too simplistic. I identify the flaws of the existing regulatory framework and provide an alternative full model framework constructed around the three-factor diffusion model recently proposed by the Danish Society of Actuaries. By use of a simulation study I compare the deterministic inflation scheme applied in the industry to a stochastic scheme and show that the real value of the pension saver’s investment portfolio at retirement is highly dependent on the inflation scheme. As the deterministic scheme does not take state variable correlations into account it overestimates the expected portfolio value in real terms compared to the stochastic scheme. Moreover, the deterministic scheme gives rise to a more heavy-tailed distribution implying a misestimation of downside risk and upside potential. Finally, it is shown in a realistic case study that the pension saver’s expected retirement payout profile is heavily affected.     

金融危机对拉美国家私营养老金的影响及经验启示

2008年爆发的金融危机对全球经济产生了重要影响,也对拉美国家私营养老金制度的发展产生了巨大冲击。文章介绍了拉美国家私营养老金制度的改革路径和养老基金概况,从养老金资产价值、投资收益率、投资组合、雇员、制度覆盖面和缴费密度方面切入,分析了金融危机对拉美私营养老金制度的影响。在现状分析的基础上,得出了要保障私营养老金制度可持续运行的一些经验启示:构建多元化的混合型养老金体系,增强退休和养老金支付的灵活性,积极运用生命周期投资策略,实施多元化和分散化投资,以养老金长期收益作为投资目标,建立社会风险应急储备基金和政府担保机制,以及加强员工退休教育。     

A Tournament Model of Fund Management

Abstract:  We develop a tournament model of portfolio management and test it on UK investment trusts. Our model extends the literature by analysing middle-ranking funds who aim to beat a benchmark; spanning two periods; focusing on 'extreme' portfolios; and using a signal-extraction framework. We predict that 'losing' managers will adopt extreme portfolios, and increasingly so, the further behind the fund is and the nearer the ranking date. Losing managers will choose high/low market exposure depending both on anticipated market movements and on whether they have sufficient assets to take advantage of a rising market. Our empirical tests support these predictions.